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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1999
OR
[_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number 0-19651
MAGAININ PHARMACEUTICALS INC.
(Exact name of registrant as specified in its charter.)
Delaware 13-3445668
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5110 Campus Drive, Plymouth Meeting, PA 19462
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 941-4020
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None N/A
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.002 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant is approximately $164,385,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the National Market System of The Nasdaq Stock Market, on February 17, 2000. For
purposes of this calculation only, the registrant has defined affiliates as
including all directors and executive officers. The number of shares of the
registrant's Common Stock outstanding as of February 17, 2000 was 26,943,116.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference
into Part III of this Form 10-K.
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MAGAININ PHARMACEUTICALS INC.
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
Description Page No.
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<S> <C> <C> <C>
Part I Item 1 Business........................................................................ 2
Item 2 Properties...................................................................... 25
Item 3 Legal Proceedings............................................................... 25
Item 4 Submission of Matters to a Vote of Security Holders............................. 25
Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters........... 26
Item 6 Selected Financial Data......................................................... 27
Item 7 Management's Discussion and Analysis of Results of Operations and
Financial Condition............................................................. 27
Item 7A Quantitative and Qualitative Disclosure About Market Risk....................... 31
Item 8 Financial Statements and Supplementary Data..................................... 31
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................ 31
Part III Item 10 Directors and Executive Officers of the Registrant.............................. 31
Item 11 Executive Compensation.......................................................... 31
Item 12 Security Ownership of Certain Beneficial Owners and Management.................. 31
Item 13 Certain Relationships and Related Transactions.................................. 31
Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 32
Index to Financial Statements................................................... F-1
</TABLE>
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Item 1. BUSINESS
GENERAL
Magainin Pharmaceuticals is a biopharmaceutical company with research and
development efforts in anti-angiogenesis, respiratory genomics and infectious
disease.
Anti-Angiogenesis Program
Squalamine is our lead product development candidate currently being
evaluated in Phase II clinical studies for the treatment of solid tumors.
Clinical studies are currently ongoing in non-small cell lung cancer, ovarian
cancer and certain other solid tumors. Additional studies are expected to
commence in pediatric neuroblastoma and prostate cancer. These studies will
evaluate intravenously administered squalamine in combination with leading
chemotherapeutics in each indication.
Originally discovered in the dogfish shark, squalamine is part of a class
of naturally occurring, pharmacologically active small molecules known as
aminosterols. Squalamine is an anti-angiogenic molecule with a unique mechanism
of action and has shown broad application across several cancer types in
preclinical testing.
Cancer includes many different types of uncontrolled cellular growth.
Clusters of cancer cells, referred to as tumors, may invade and destroy
surrounding organs, impair physiological function and lead to death. To survive,
cancer cells require oxygen and nutrients, which are received from the body's
blood supply. In order to access this blood supply, cancer cells initiate a
biochemical mechanism that stimulates angiogenesis, which provides the blood
supply that nourishes the tumor. As cancer cells grow and metastasize (spread
from primary sites to secondary sites) they require continuous angiogenesis.
Anti-angiogenic substances are intended to inhibit the growth of new blood
vessels and thereby suppress tumor growth.
Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has exhibited
anti-angiogenic properties in a number of in vitro and in vivo assays, and in
animal models. Squalamine is believed to inhibit the growth of primitive or
embryonic capillaries associated with tumor growth. Squalamine has the potential
to be used in combination with a number of cytotoxic drugs in the treatment of
solid tumors, and we have observed synergies with certain such cytotoxic
therapies in animal testing.
We also maintain a research program evaluating squalamine in eye disease.
Collaborators at Georgetown University have recently received a grant from the
Juvenile Diabetes Foundation to study squalamine in diabetic retinopathy, a
leading cause of blindness caused by aberrant blood vessel growth in the eye.
Additionally, we expect to initiate clinical testing of squalamine in
fibrodysplasia ossificans progressiva, a rare genetic disorder in which there is
progressive immobility and disability.
Respiratory Genomics
In 1996, Magainin initiated a research program in the genomics of asthma.
Genomics analyses in both humans and animals have generated substantial support
for interluken-9 (IL9) as a major mediator of asthma. IL9 is a gene that varies
in DNA structure and function in asthmatic and allergic humans and animals. We
maintain a comprehensive research and development program to identify additional
genes which may be implicated in respiratory disease. We investigate the role of
these genes in the allergic inflammatory response, with the objective of
utilizing the optimal biologic gene targets in the development of novel
therapeutics for asthma and allergy.
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We have three distinct areas of focus within the respiratory program:
Biologics Based Anti-IL9 Therapeutics
We believe an antibody to IL9 has significant promise as a therapy for
asthma. In December 1998, we entered into a collaborative research and option
agreement with Genentech, Inc. relating to the development of a protein
therapeutic in asthma. We are currently in discussions with Genentech as to the
continuation and expansion of this program.
Asthma Gene Database (Screening Program)
We employ functional genomics to discover additional therapeutic targets
for respiratory disease. Numerous targets have been identified, validated and
added to our Asthma Gene Database. These include genes and gene products that
can be antagonized by biological therapeutics, such as proteins and traditional
small molecules. Chemical libraries can be screened for activity against these
targets using our proprietary high throughput screening programs.
Small Molecule Therapeutics
We have identified a number of small molecules which we believe to be
excellent drug development candidates in respiratory disease. These include
MSI-1432, which blocks T-cell adhesion and proliferation in response to
antigens. Other small molecules have also been evaluated, including MSI-1953, an
inhibitor of mucin production.
Infectious Disease
We have conducted research and development efforts in infectious diseases
over many years. The magainin class of compounds, originally discovered in the
frog, have been shown to have activity against a variety of pathogens, including
bacteria, amoebae, fungi and parasites.
Antibiotic resistance, an increasing problem, is the process by which
antibiotics lose their effectiveness over time as bacteria, through mutation,
develop the means to produce enzymes capable of diminishing the utility of an
antibiotic. We have not noted the development of antibiotic resistance to the
magainins. We believe this is due to the unique mechanism of action of the
magainins; magainins puncture the cell membrane and break down the integrity of
the cell, killing bacteria differently than traditional antibiotics.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of
infection in diabetic foot ulcers, had been our lead product development
candidate. LOCILEX(TM) Cream did not obtain approval from the FDA in July 1999,
and we have since refocused our near-term product development efforts on other
programs.
Other Programs
We have engaged in extensive research and development efforts on compounds
derived from the host-defense systems of animals. The host-defense system is the
complex of natural processes and mechanisms used by animals and humans as
protection against disease. Naturally occurring molecules, such as the magainins
and aminosterols, provide a first line of defense against infection and other
diseases. Our intent is to leverage off the many thousands of years in which
these compounds have worked in animal systems, in evaluating the pharmacologic
activity of such compounds in human disease.
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Other Magainin Peptides
Magainin peptides have demonstrated in preclinical testing the potential
for broad application in a number of indications:
Cancer/Tumorcidal: MSI-1857 is a chemically modified magainin peptide
formulated for systemic delivery. In preclinical animal models, MSI-1857
enhanced the cellular uptake and activity of standard chemotherapeutics against
tumors. MSI-1596 is a generic antibiotic peptide with similar activity to MSI-
1857. Preclinical testing of MSI-1596 in animal models is underway where
demonstration of substantial anti-tumor activity may provide for a rapid
clinical development program.
Other Topical Infections: Various magainin peptides have shown promise in a
broad variety of applications including eye infections, acne, sexually
transmitted diseases and yeast infections. There may also be potential use
against viruses, including rhinoviruses that cause the common cold.
Systemic Infections: Magainin peptides are broad spectrum antibiotics that
have shown no resistance or cross-resistance to other anti-infectives in testing
to date. Preclinical data demonstrated activity against pathogens in various
infectious disease models.
Agricultural Anti-Fungal: Ornamental plants genetically altered to express
certain magainins have shown resistance to fungal and other crop diseases.
We are developing an E. coli-based recombinant manufacturing process.
Recombinant methods would increase the availability, and decrease the cost, of
magainin peptides for various applications.
Other Aminosterols
We have discovered a number of other aminosterol compounds in the shark,
each differing from squalamine in chemical structure and interacting with a
separate, specific receptor. These compounds affect the intracellular metabolism
in a manner that disturbs the target cell responses to certain growth factors,
hormones and other signals. Therapeutic opportunities for these compounds may
include obesity, various malignancies, inflammatory diseases, and viral
infections.
Defensins
In the process of researching animal host-defenses across different
species, we have helped demonstrate that all species, including humans, utilize
some form of local antimicrobial defense beyond their systemic immune systems.
In humans, we have identified host-defense molecules (defensins) in the lungs,
the GI tract and the skin. We have also identified several natural "inducers" of
local antimicrobial defenses. Some of these compounds are found in nature, are
generally regarded as safe (i.e., GRAS substances), and may possess novel
nutritional, as well as, pharmaceutical immunostimulant applications.
______________________
Since commencing operations, we have not generated any sales revenue. We
have funded operations primarily from the proceeds of public and private
placements of securities. We have incurred losses in each year since inception,
and we expect to incur substantial additional losses for the next several years.
We currently have no marketable products, and it may be several years, if ever,
until marketable products are developed and approved.
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RISK FACTORS RELATED TO OUR BUSINESS
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these include statements relating to present or anticipated scientific progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financing and
collaborations, personnel, manufacturing requirements and capabilities, and
other statements regarding matters that are not historical facts or statements
of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make, or by
known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our filings with the SEC. Also note that we provide the following
cautionary discussion of risks and uncertainties relevant to our business. These
are factors that we think could cause our actual results to differ materially
from expected results. Other unanticipated occurrences besides those listed here
could also adversely affect us. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
If We Do Not Raise Additional Capital, We May Not Be Able to Continue Our
Research and Development Programs and May Never Commercialize Any Products.
We maintained cash and investments of $10,600,000 at December 31, 1999. At
December 31, 1999, we had current liabilities of $3,200,000. In the absence of
raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond 2000. We will need to raise
substantial additional funds in the future to continue our research and
development programs and to commercialize our potential products. If we are
unable to raise such funds, we may be unable to complete our development
activities for any of our proposed products.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds, and may be unable to obtain
sufficient funding in the future on acceptable terms. If we cannot obtain
funding, we will need to delay, scale back or eliminate research and development
programs or enter into collaborations with third parties to commercialize
potential products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
We expect to evaluate all available strategic alternatives to finance our
programs and technology, including broad-based alliances or mergers intended to
create better-financed entities.
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We Expect to Continue to Incur Substantial Losses.
To date, we have engaged primarily in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of December 31, 1999, we
had an accumulated deficit of approximately $145,100,000.
Our proposed products are in a relatively early developmental stage and
will require significant research, development and testing. We must obtain
regulatory approvals for all of our proposed products prior to commercialization
of the product. Our operations are also subject to various competitive and
regulatory risks. As a result, we are unable to predict when or if we will
achieve any product revenues. We expect to experience substantial losses in the
foreseeable future as we continue our research, development and testing efforts,
which will cause us to have continued negative results of operations.
The FDA Has Deemed Our New Drug Application, NDA, for LOCILEX(TM) Cream to Be
Not Approvable, Which Will Prevent Near-Term Commercialization of the Product.
We announced on July 26, 1999 that we received notification from the U.S.
Food and Drug Administration, FDA, that our NDA for LOCILEX(TM) Cream had been
deemed not approvable.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of
infection in diabetic foot ulcers, had been our lead product development
candidate. We had hoped to commercialize LOCILEX(TM) Cream in the near-term.
However, with the FDA's decision, near-term commercialization of LOCILEX(TM)
Cream will not occur, and we will generate no revenues from LOCILEX(TM) Cream in
the near future.
In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities. The specific nature of the clinical activities will be
determined after consultations with the FDA. As a result of its review of
manufacturing of the cream product, the FDA issued certain observations of
deficiencies in compliance with good manufacturing procedures. In any additional
clinical studies to be conducted, new batches of the cream product will need to
be manufactured from the bulk drug substance, in compliance with good
manufacturing procedures, and meeting strict product specifications. Further
clinical and manufacturing development efforts may again not be successful. The
time required to conduct such activities may be lengthy, and the costs
considerable.
If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to
Commercialize Any of Our Product Candidates.
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we
receive approval of a product candidate, it may be conditioned upon certain
limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:
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. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
1. FDA Marketing Approval:
The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA. In order to obtain approval from the FDA to
market any drug, we must submit proof of safety, efficacy and quality for each
of our proposed products for each indication, which requires extensive and time
consuming preclinical and clinical testing. The results of preclinical studies
are submitted to the FDA as part of an Investigational New Drug Application or
IND. Once the IND is effective, human clinical trials may be conducted. The
results of the clinical trials are submitted to the FDA as part of a NDA.
Following review of the NDA, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
2. FDA Manufacturing Approval:
Detailed manufacturing information is also required to be included in the
NDA, for review and approval by the FDA. All manufacturing facilities and
processes must comply with good manufacturing practices, or GMP, regulations
prescribed by the FDA. All manufacturers must, among other things, pass
manufacturing plant inspections and provide records of detailed manufacturing
processes. Among other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality
standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a
designated level.
3. Ongoing FDA Oversight:
We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized. Among other things, the FDA may:
. require additional submissions if there are any modifications to the
drug product including, for example, any changes in manufacturing
process, labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects
of approved drug products; and
. enforce conditional approvals that restrict the commercial
applications of a drug product.
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Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a
one-time basis for applications for approval, and on an annual basis for
manufacturing and marketing of prescription drugs.
4. Other Regulatory Bodies:
We are also subject to regulation by other regulatory authorities,
including the Occupational Safety and Health Administration, the Environmental
Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement
Agency and the United States Department of Agriculture, and to regulation under
the Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other regulatory statutes.
Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the FDA
prior to marketing the product in those countries. The time required to obtain
foreign approvals may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local
regulations or additional fees. Efforts are continually underway to reform
federal regulation of drug products. Although some of these changes could
streamline and otherwise benefit development, marketing and related requirements
for drugs, others could increase regulatory requirements.
We Will Rely on Marketing and Development Partners and if They Do Not Perform as
Expected, We May Not Successfully Commercialize Our Products.
We do not have our own sales and marketing staff. In order to successfully
develop and market our products, we must enter into marketing and distribution
arrangements with third parties. We also expect to delegate the responsibility
for all, or a significant portion, of the development and regulatory approval
for certain products to partners. If our partners do not develop an approvable
or marketable product or do not market a product successfully, we may not
achieve necessary product revenues. Additionally, we may be unable to enter into
other successful arrangements.
We concluded a collaborative research agreement with Genentech, Inc. in the
asthma area in December 1999. We are currently in discussions with Genentech as
to the continuation and expansion of this program. Genentech may choose not to
enter into an agreement, or we may not be able to agree upon terms for an
agreement. We will need partners in the asthma area to assist us with
commercializing our technology, and we may be unable to enter into a similar
agreement or find as effective a partner as Genentech.
We also have a development, supply and distribution agreement with
SmithKline Beecham for LOCILEX(TM) Cream. Future milestone payments and sales
proceeds from SmithKline will occur only if LOCILEX(TM) Cream is eventually
approved.
We do not have control over the amount and timing of resources to be
devoted to our products by our collaborative partners. In the future, the
interests of our collaborators may not be consistent with our interests.
Collaborators may develop products independently or through third parties that
could compete with our proposed products. For example, SmithKline maintains a
significant presence in the antibiotic area and currently sells a topical
antibiotic product indicated for the treatment of certain skin infections.
We may also decide to establish our own sales force to market and sell
certain products. Although certain members of our management have limited
experience in the marketing of pharmaceutical products, we have no
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experience with respect to marketing our products. If we choose to pursue this
alternative, we will need to spend significant additional funds and devote
significant management resources and time to establish a successful sales force.
Given our inexperience in establishing and managing a salesforce, this effort
may not be successful. Given our financial resources, efforts in this area would
likely be modest compared to our competitors.
If We Are Not Able to Innovate and Develop Products as Rapidly as Our
Competitors, Our Products May Not Achieve Market Acceptance.
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense systems
is being conducted by others. Many companies are also currently involved in
research and development activities focused on the pathogenesis of disease, and
the competition among companies attempting to find genes responsible for disease
is intense. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources. We may
also face competition from companies using different or advanced techniques that
could render our products obsolete.
We expect technological developments in the biopharmaceutical field to
occur at a rapid rate and expect competition to intensify as advances in this
field are made. Accordingly, we must continue to devote substantial resources
and efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that have
significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining regulatory
approvals of such products. Some of these companies may be in advanced phases of
clinical testing of various drugs that may be competitive with our proposed
products.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology. In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.
Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain advantages over LOCILEX(TM) Cream. In addition, we may be
unable to manufacture LOCILEX(TM) Cream at a cost which will allow it to be sold
at a competitive price relative to oral antibiotics or other topical antibiotics
that may be used for this indication.
Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their interests.
In the cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.
If We Do Not Develop and Maintain Relationships With Contract Manufacturers, We
May Not Successfully Commercialize Our Products.
1. Contract Manufacturing:
We currently have neither the resources, facilities, nor the technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no plans to establish a
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manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the number
of companies capable of producing our proposed products is limited. We may be
unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a manufacturing
process. In order to engage another manufacturer, we may need to obtain a
license or other technology transfer from the original contract manufacturer.
Even if a license is available from the original contract manufacturer on
acceptable terms, we may be unable to successfully effect the transfer of the
technology to the new contract manufacturer. Any such technology transfer may
also require the transfer of requisite data for regulatory purposes, including
information contained in a proprietary drug master file held by a contract
manufacturer. If we rely on a contract manufacturer that owns the drug master
file, our ability to change contract manufacturers may be more limited.
We had an agreement with Abbott Laboratories providing for the purchase of
approximately $10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream did not occur, we renegotiated this agreement with
Abbott in 1999, paying Abbott $4,200,000 and receiving partial delivery of
material. An additional $3,400,000 million is due to Abbott and payable if we
receive in excess of $10,000,000 of additional funds in any year beginning in
2000, in which case 15% of such excess over $10,000,000 shall be payable to
Abbott. We have no further purchase commitments to Abbott, and Abbott has no
further supply requirements to us.
2. Alternative Production Processes:
The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of traditional antibiotics. We
are pursuing alternative manufacturing sources, including recombinant
manufacturing, in order to improve the gross margins available to us on any
sales of these products. These programs, however, are at an early stage and will
require significant expenditures over an extended period of time. Ultimately, we
may be unable to develop a more cost-effective manufacturing process and, even
if we develop a more cost-effective process, the FDA may not approve such a
process.
We are also currently working with outside contractors for the chemical
production of squalamine. Production of squalamine and other proposed products
will also require significant expenditure.
3. Alternative Future Uses of LOCILEX(TM) Cream:
There are no currently identified alternative uses of bulk drug substance
for LOCILEX(TM) Cream.
We Depend on Our Intellectual Property, and If We Are Unable to Protect Our
Intellectual Property We May Not Realize Optimal Value from Our Technology.
1. Patents:
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies, both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.
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We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications in
the scientific or patent literature lag behind actual discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the
technology;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against
allegations of infringement of third-party patents;
. our issued patents will be held valid in court; or
. an adverse outcome in a suit would not subject us to significant
liabilities to third parties, require rights to be licensed from third
parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
2. Potential Ownership Disputes:
There may be disputes arising as to the ownership of our technology. Most
of our research and development personnel previously worked at other
biotechnology companies, pharmaceutical companies, universities, or research
institutions. These entities may raise questions as to when technology was
developed, and assert rights to the technology. These kind of disputes have
occurred in the past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants are
operating when they make certain discoveries. We may not prevail in any such
disputes.
3. Other Intellectual Property:
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors. We
may find that these agreements will be breached, or that our trade secrets have
otherwise become known or independently developed or discovered by our
competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties on
sales of any products which are covered by patent claims. If we are unable to
pay the royalties we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our rights.
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If We Cannot Recruit and Retain Qualified Management, We May Not Be Able to
Successfully Develop and Commercialize Our Products.
We depend to a considerable degree on a limited number of key personnel.
Many key responsibilities have been assigned to a relatively small number of
individuals. We do not maintain "key man" insurance on any of our employees. The
loss of certain management and technical personnel could adversely affect our
ability to develop and commercialize products.
We are Subject to Potential Product Liability Claims, Which Could Result in
Significant Expense if a Claim Arose.
We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:
. our proposed products cause some undesirable side effects or injury
during clinical trials;
. our products cause undesirable side effects or injury in the market;
or
. third parties that we have agreed to indemnify incur liability.
While we carry insurance, this coverage is expensive and we may be unable
to maintain adequate coverage on acceptable terms.
If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug
Candidates, Some Patients May Be Unable to Afford Our Products and Sales Could
Suffer.
In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations, can impact prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for medical products and services, particularly where they
believe that there is only an incremental therapeutic benefit which does not
justify the additional cost. Coverage and reimbursement may not be available for
our proposed products, or, if available, may not be adequate. Without insurance
coverage, many patients may be unable to afford our products, and we may not
reach optimal sales levels.
There has also been a trend toward government reforms intended to contain
or reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals to
implement similar government control.
We expect this trend to continue, but we cannot predict the nature or
extent of any reform that results. It is possible that reform could impact
pharmaceutical marketing and pricing. Not only would this affect possible future
profit margins, it could adversely affect our ability to obtain financing for
the continued development of our proposed products. Furthermore, reforms could
have a broader impact by limiting overall growth of health care spending, such
as Medicare and Medicaid spending, which could also adversely effect our
business.
Our Stock Price Is Extremely Volatile Due to a Number of Factors.
The market prices and trading volumes for securities of biopharmaceutical
and biotechnology companies, including ours, have historically been, and will
likely continue to be, highly volatile. Future events affecting our business, or
that of our competitors, may significantly impact our stock price, including:
. product testing results,
. technological innovations,
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. new commercial products,
. government regulations,
. proprietary rights,
. regulatory actions, and
. litigation.
We May Be Unable to Maintain the Standards for Listing on the Nasdaq National
Market, Which Could Make it More Difficult for Investors to Dispose of Our
Common Stock and Could Subject Our Common Stock to the "Penny Stock" Rules.
Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including a
minimum bid price for shares of a company's stock and a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap
Market unless we are unable to meet the requirements for inclusion therein. If
we were unable to meet the requirements for inclusion in the Small Cap Market,
our common stock would be traded on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in quotations
published by the National Quotation Bureau, Inc. that are commonly referred to
as the "pink sheets." As a result, it could be more difficult to sell, or obtain
an accurate quotation as to the price of our common stock.
In addition, if our common stock were delisted, it would be subject to the
so-called "penny stock" rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions.
For transactions covered by the penny stock rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the sale.
The penny stock rules also require broker-dealers to deliver monthly statements
to penny stock investors disclosing recent price information for the penny stock
held in the account, and information on the limited market in penny stocks.
Prior to the transaction, a broker-dealer must provide a disclosure schedule
relating to the penny stock market. In addition, the broker-dealer must disclose
the following:
. commissions payable to the broker-dealer and the registered
representative; and
. current quotations for the security as mandated by the applicable
regulations.
If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it to be more difficult to trade our common stock, and an
investor may find it more difficult to acquire or dispose of our common stock in
the secondary market.
The Exercise of Options and Warrants and Other Issuances of Shares Could Have A
Dilutive Effect on Our Stock Price.
As of December 31, 1999, there were outstanding options to purchase an
aggregate of 3,662,000 shares of our common stock at prices ranging from $0.40
per share to $16.75 per share, of which approximately 2,141,000 were exercisable
as of such date. Also outstanding at December 31, 1999 were warrants to purchase
229,739 shares of our common stock exercisable at $8.00 per share, and warrants
to purchase an aggregate of 1,158,210 shares of our common stock, currently
exercisable from $5.35-$7.37 per share, and subject to adjustment with future
offerings. Exercise of options and warrants at prices below the market price of
our common stock could adversely affect the
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price of our common stock. Additional dilution may result from the issuance of
shares in connection with collaborations or manufacturing arrangements, or in
connection with other financing efforts.
Our Certificate of Incorporation and Delaware Law Contain Provisions that Could
Discourage a Takeover.
Our certificate of incorporation provides our board of directors the power
to issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of Magainin. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely discourage
third parties from seeking to obtain control.
THE COMPANY
Background
Magainin Pharmaceuticals is a biopharmaceutical company with research and
development efforts in anti-angiogenesis, respiratory genomics and infectious
disease.
Anti-Angiogenesis Program
Squalamine is our lead product development candidate currently being
evaluated in Phase II clinical studies for the treatment of solid tumors.
Clinical studies are currently ongoing in non-small cell lung cancer, ovarian
cancer and certain other solid tumors. Additional studies are expected to
commence in pediatric neuroblastoma and prostate cancer. These studies will
evaluate intravenously administered squalamine in combination with leading
chemotherapeutics in each indication.
Originally discovered in the dogfish shark, squalamine is part of a class
of naturally occurring, pharmacologically active small molecules known as
aminosterols. Squalamine is an anti-angiogenic molecule with a unique mechanism
of action and has shown broad application across several cancer types in
preclinical testing.
Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The basic
network of the vasculature is developed through angiogenesis, a fundamental
process by which new blood vessels are formed. This growth process primarily
occurs during the first three months of embryonic development. Once the general
network of the blood vessels is complete, certain inhibitory factors balance and
stabilize the stimulators of new blood vessel formation. Although angiogenesis
occurs in human embryonic development, wound healing and in certain reproductive
processes in women, angiogenesis is also associated with several diseases,
including cancer, diabetic retinopathy and macular degeneration.
Cancer includes many different types of uncontrolled cellular growth.
Clusters of cancer cells, referred to as tumors, may invade and destroy
surrounding organs, impair physiological function and lead to death. To survive,
cancer cells require oxygen and nutrients, which are received from the body's
blood supply. In order to access this blood supply, cancer cells initiate a
biochemical mechanism that stimulates angiogenesis, which provides the blood
supply that nourishes the tumor. As cancer cells grow and metastasize (spread
from primary sites to secondary sites) they require continuous angiogenesis.
Anti-angiogenic substances are intended to inhibit the growth of new blood
vessels and thereby suppress tumor growth.
Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has exhibited
anti-angiogenic properties in a number of in vitro and in vivo
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assays, and in animal models. Squalamine is believed to inhibit the growth of
primitive or embryonic capillaries associated with tumor growth. Squalamine has
the potential to be used in combination with a number of cytotoxic drugs in the
treatment of solid tumors, and we have observed synergies with certain such
cytotoxic therapies in animal testing.
Cancer is the second most common cause of death in the Western world,
exceeded only by coronary heart disease. Cancer patients are usually treated
with a combination of surgery, radiation therapy and chemotherapy. Surgery and
radiation therapy can be particularly effective in patients in which the disease
has not yet spread to other tissue or organs. Chemotherapy is the principal
treatment for tumors that have metastasized. Chemotherapy involves the
administration of so-called cytotoxic drugs designed to kill cancer cells, or
the administration of hormone analogues to either reduce the production of, or
block the action of, certain hormones, such as estrogens and androgens, which
affect the growth of tumors. Because chemotherapeutic agents generally attack
rapidly dividing cells indiscriminately, damaging both normal and cancerous
cells, chemotherapy patients often suffer serious side effects. Additionally,
resistance to chemotherapy inevitably occurs over time.
We also maintain a research program evaluating squalamine in eye disease.
Collaborators at Georgetown University have recently received a grant from the
Juvenile Diabetes Foundation to study squalamine in diabetic retinopathy, a
leading cause of blindness caused by aberrant blood vessel growth in the eye.
Additionally, we expect to initiate clinical testing of squalamine in
fibrodysplasia ossificans progressiva, a rare genetic disorder in which there is
progressive immobility and disability.
Respiratory Genomics
In 1996, Magainin initiated a research program in the genomics of asthma.
Genomics analyses in both humans and animals have generated substantial support
for interluken-9 (IL9) as a major mediator of asthma. IL9 is a gene that varies
in DNA structure and function in asthmatic and allergic humans and animals. We
maintain a comprehensive research and development program to identify additional
genes which may be implicated in respiratory disease. We investigate the role of
these genes in the allergic inflammatory response, with the objective of
utilizing the optimal biologic gene targets in the development of novel
therapeutics for asthma and allergy.
Asthma is a serious, chronic illness characterized by one or more symptoms,
including episodic shortness of breath, wheezing, coughing and chest tightness,
that appears to be increasing in prevalence and severity. The complex
pathophysiology of asthma is under intensive scrutiny; however, its precise
causes are not well understood. The recognition that specific genetic and
environmental factors are important in the etiology of asthma has prompted an
intensive search for genes that significantly influence susceptibility to this
common disorder. While genetic susceptibility to bronchial hyperresponsiveness
and asthma is likely due to multiple genes acting together, the identification
of specific susceptibility genes provides valuable insight into the molecular
pathways associated with this condition.
We have three distinct areas of focus within the respiratory program:
Biologics Based Anti-IL9 Therapeutics
We believe an antibody to IL9 has significant promise as a therapy for
asthma. In December 1998, we entered into a collaborative research and option
agreement with Genentech, Inc. relating to the development of a protein
therapeutic in asthma. We are currently in discussions with Genentech as to the
continuation and expansion of this program.
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Asthma Gene Database (Screening Program)
We employ functional genomics to discover additional therapeutic targets
for respiratory disease. Numerous targets have been identified, validated and
added to our Asthma Gene Database. These include genes and gene products that
can be antagonized by biological therapeutics, such as protein, and traditional
small molecules. Chemical libraries can be screened for activity against these
targets using our proprietary high throughput screening programs.
Small Molecule Therapeutics
We have identified a number of small molecules which we believe to be
excellent drug development candidates in respiratory disease. These include MSI-
1432, which blocks T-cell adhesion and proliferation in response to antigens.
Other small molecules have also been evaluated, including MSI-1953, an inhibitor
of mucin production.
Infectious Disease
We have conducted research and development efforts in infectious diseases
over many years. The magainin class of compounds, originally discovered in the
frog, have been shown to have activity against a variety of pathogens, including
bacteria, amoebae, fungi and parasites.
Antibiotic resistance, an increasing problem, is the process by which
antibiotics lose their effectiveness over time as bacteria, through mutation,
develop the means to produce enzymes capable of diminishing the utility of an
antibiotic. We have not noted the development of antibiotic resistance to the
magainins. We believe this is due to the unique mechanism of action of the
magainins; magainins puncture the cell membrane and break down the integrity of
the cell, killing bacteria differently than traditional antibiotics.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of
infection in diabetic foot ulcers, had been our lead product development
candidate. LOCILEX(TM) Cream did not obtain approval from the FDA in July 1999,
and we have since refocused our near-term product development efforts on other
programs.
Other Programs
We have engaged in extensive research and development efforts on compounds
derived from the host-defense systems of animals. The host-defense system is the
complex of natural processes and mechanisms used by animals and humans as
protection against disease. Naturally occurring molecules, such as the magainins
and aminosterols, provide a first line of defense against infection and other
diseases. Our intent is to leverage off the many thousands of years in which
these compounds have worked in animal systems, in evaluating the pharmacologic
activity of such compounds in human disease.
Other Magainin Peptides
Magainin peptides have demonstrated in preclinical testing the potential
for broad application in a number of indications:
Cancer/Tumorcidal: MSI-1857 is a chemically modified magainin peptide
formulated for systemic delivery. In preclinical animal models, MSI-1857
enhanced the cellular uptake and activity of standard chemotherapeutics against
tumors. MSI-1596 is a generic antibiotic peptide with similar activity to
MSI-1857. Preclinical testing of
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MSI-1596 in animal models is underway where demonstration of substantial anti-
tumor activity may provide for a rapid clinical development program.
Other Topical Infections: Various magainin peptides have shown promise in a
broad variety of applications including eye infections, acne, sexually
transmitted diseases and yeast infections. There may also be potential use
against viruses, including rhinoviruses that cause the common cold.
Systemic Infections: Magainin peptides are broad spectrum antibiotics that
have shown no resistance or cross-resistance to other anti-infectives in testing
to date. Preclinical data demonstrated activity against pathogens in various
infectious disease models.
Agricultural Anti-Fungal: Ornamental plants genetically altered to express
certain magainins have shown resistance to fungal and other crop diseases.
We are developing an E.coli-based recombinant manufacturing process.
Recombinant methods would increase the availability, and decrease the cost, of
magainin peptides for various applications.
Other Aminosterols
We have discovered a number of other aminosterol compounds in the shark,
each differing from squalamine in chemical structure and interacting with a
separate, specific receptor. These compounds affect the intracellular metabolism
in a manner that disturbs the target cell responses to certain growth factors,
hormones and other signals. Therapeutic opportunities for these compounds may
include obesity, various malignancies, inflammatory diseases, and viral
infections.
Defensins
In the process of researching animal host-defenses across different
species, we have helped demonstrate that all species, including humans, utilize
some form of local antimicrobial defense beyond their systemic immune systems.
In humans, we have identified host-defense molecules (defensins) in the lungs,
the GI tract and skin. We have also identified several natural "inducers" of
local antimicrobial defenses. Some of these compounds are found in nature, are
generally regarded as safe (i.e., GRAS substances), and may possess novel
nutritional, as well as, pharmaceutical immunostimulant applications.
Drug Discovery
Host-Defense Drug Discovery
Our approach to identifying pharmaceutically active compounds in the host-
defense systems of animals involves the extraction of compounds from animal
tissues. The extracts are assayed for activity against selected pathogens, such
as bacteria, fungi, viruses and certain cancers. We then purify the active
compounds and determine the precise chemical structure of the purified molecule.
Once naturally occurring molecules have been isolated, we analyze the
relationship between the molecular structure of the compound and its biological
activity. In general, this requires that we identify the structures in the
compound that are believed to have therapeutic effects and analyze how the
compounds could be modified to improve the desired therapeutic effects. We then
utilize our combinatorial chemistry capabilities to modify the molecules to
alter biological activity or increase stability.
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Magainins
While conducting genetic and molecular biological research at the National
Institutes of Health in 1987, Dr. Michael A. Zasloff, presently our Vice
Chairman and Executive Vice President, isolated the first magainins from the
African frog Xenopus laevis. In connection with his research, Dr. Zasloff was
performing surgery on African clawed frogs in his laboratory. After suturing the
frogs and returning them to their aquarium tank, he noticed that the incisions
healed without infection, inflammation or notable scarring, despite being
exposed to the bacteria-filled aquarium water. Dr. Zasloff deduced that the
frogs produced a substance that protected them against infection. Eventually, he
isolated, from the frog's skin, two related peptides, which he called magainins,
and which were later shown to kill a variety of pathogens, including bacteria,
amoebae, fungi and parasites.
Magainins are peptides. A peptide is a chain of molecules, known as amino
acids, that are considered to be one of the basic building blocks of the human
body. Chains of 2 to 50 amino acids are generally referred to as peptides, while
longer chains are referred to as proteins. We have modified natural peptides by
rearranging the order and combination of amino acids and by substituting and
deleting additional amino acids to produce magainins having a broader spectrum
of therapeutic activity and improved potency.
In the presence of a cell membrane rich in acidic phospholipids and poor in
cholesterol, such as bacterial membranes, magainins twist into two-sided, spiral
shaped molecules (helices), with one side soluble in the fat-like substance that
comprise cell membranes and the other side soluble in water. Individual magainin
peptides then aggregate and form a channel in the membrane of a pathogen. Once
formed, this aggregation of magainin peptides punctures the cell membrane,
breaks down the integrity of the cell and kills the pathogen. By rupturing
bacteria and targeting a fundamental difference in cell membrane composition,
magainins target and kill bacterial differently than traditional antibiotics. In
certain cases, cancer cells also exhibit sufficient acidic phospholipids on
their external membranes to be lysed by magainin peptides.
Aminosterols
Squalamine was discovered in the body tissues of the dogfish shark. The
shark was initially examined because of its known resistance to infection and
cancer. The chemical structure of squalamine uniquely combines a steroid and a
polyamine, two classes of systemic agents that are generally well tolerated in
humans. Beyond squalamine, we have discovered several other aminosterol
compounds in the shark. In preclinical testing, some of these compounds have
demonstrated an ability to control cell growth, along with other pharmacologic
properties. These properties may have application in the treatment of a number
of disease indications characterized by cell proliferation, including cancer.
Respiratory Genomics and Drug Discovery
Advances in genetics and molecular biology have significantly enhanced the
ability of scientists to clone and sequence genes and identify the causes of
disease at the molecular level. Genomics, or the study of the genome, can be
applied to the examination of the genetic influences on human disease.
Functional genomics refers to the determination of the manner in which disease
genes specifically impact the disease process. In contrast to traditional drug
discovery and development, a genetic approach commences by identifying those
genes that are responsible for the initiation or progression of disease.
Analysis of DNA (deoxyribonucleic acid) helps characterize the specific role of
genes in the disease process. The information stored in the DNA of a gene acts
as a set of instructions to living cells of the organism. These instructions
direct the cells to synthesize specific proteins, such as hormones or enzymes
that perform the basic biochemical and physiological functions of the cells.
Disease may occur when a defect (mutation) occurs in a gene or genes, resulting
in incorrect instructions being sent to cells, and disrupting the normal balance
or function of these essential proteins. The ability to detect such a mutation
and to understand how the disruption of normal protein function contributes to
the initiation and progression of the
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resultant disease are potentially valuable aids to pharmaceutical discovery and
development. To identify an appropriate molecular target for therapeutic
intervention, it may also be necessary to characterize fully the biochemical
pathway in which the disease gene functions.
We employ a functional genomics approach to understand the genetic basis of
disease and to develop potential drug leads. Through these efforts we seek to
identify appropriate targets for pharmaceutical intervention that aim to control
the root cause of human disease. We believe that pharmaceuticals developed for
use against these specific targets have the potential for greater effectiveness
and fewer side effects than pharmaceuticals developed through more traditional
processes.
Collaborative Arrangements
Development and Marketing Collaborations
Collaborations may allow us to leverage our scientific and financial
resources and gain access to markets and technologies that would not otherwise
be available to us. In the long term, development and marketing arrangements
with established companies in the markets in which potential products will
compete may allow our products more efficient access to intended markets and
may, accordingly, conserve our resources. We expect that we will enter into
development and marketing arrangements for most of the products we may develop.
From time to time, we hold discussions with various potential partners.
In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline has
paid us $10,000,000 under this agreement, which we received in 1997. We had
hoped to commercialize LOCILEX(TM) Cream in the near-term. However, with the
FDA's decision, near-term commercialization of LOCILEX(TM) Cream will not occur,
and we will generate no revenues from LOCILEX(TM) Cream in the near future. The
SmithKline Agreement also gives SmithKline rights to terminate the arrangement,
and, under certain conditions, the right to negotiate for rights to another
Magainin product development candidate.
In December 1998, we entered into a collaborative research and option
agreement with Genentech relating to a protein therapeutic in asthma. Under this
agreement, we jointly conducted a collaborative program to evaluate the utility
of a blocking antibody to IL9 in suppressing the asthmatic response. Genentech
made an initial equity investment of $2,000,000 in our company in 1998, and has
an option to enter into a development and commercialization agreement with our
company. Any such future development and commercialization agreement could
provide for payments to us of up to $35,000,000, upon terms to be negotiated,
and royalty payments on sales of products developed by Genentech in the field.
We are currently in discussions with Genentech as to the continuation and
expansion of this program. Genentech may choose not to enter into an agreement,
or we may not be able to agree upon terms for an agreement.
Research and License Agreements
We have rights under license agreements to several patents and patent
applications under which we expect to owe royalties on sales of any products
that are covered by issued patent claims. Additionally, certain of these
agreements also provide that if we elect not to pursue the commercial
development of any licensed technology, or do not adhere to an acceptable
schedule of commercialization, then our exclusive rights to such technology
would terminate. We also fund research at certain institutions, and these
relationships may provide us with an option to license any results of the
research.
Manufacturing
We currently have neither the resources, facilities nor capabilities to
manufacture any of our proposed products in the quantities and quality required
for commercial sale. We have no current plans to establish a manufacturing
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facility. We depend upon contract manufacturers for commercial scale
manufacturing of our proposed products in accordance with regulatory standards.
This dependence may restrict our ability to develop and deliver products on a
timely, profitable and competitive basis. Additionally, the number of companies
capable of producing our proposed products is limited. We may be unable to
maintain arrangements with qualified outside contractors to manufacture
materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a manufacturing
process. In order to engage another manufacturer, we may need to obtain a
license or other technology transfer from the original contract manufacturer.
Even if a license is available from the original contract manufacturer on
acceptable terms, we may be unable to successfully effect the transfer of the
technology to the new contract manufacturer. Any such technology transfer may
also require the transfer of requisite data for regulatory purposes, including
information contained in a proprietary drug master file held by a contract
manufacturer. If we rely on a contract manufacturer that owns the drug master
file, our ability to change contract manufacturers may be more limited.
We had an agreement with Abbott providing for the purchase of approximately
$10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA approval of
LOCILEX(TM) Cream did not occur, we renegotiated this agreement with Abbott in
1999, paying Abbott $4,200,000 and receiving partial delivery of material. An
additional $3,400,000 is due to Abbott and payable if we receive in excess of
$10,000,000 of additional funds in any year beginning in 2000, in which case 15%
of such excess over $10,000,000 shall be payable to Abbott. We have no further
purchase commitments to Abbott, and Abbott has no further supply requirements to
us.
Government Regulation
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we
receive approval of a product candidate, it may be conditioned upon certain
limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:
. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
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1. FDA Marketing Approval:
The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA. In order to obtain approval from the FDA to
market any drug, we must submit proof of safety, efficacy and quality for each
of our proposed products for each indication, which requires extensive and time
consuming preclinical and clinical testing. The results of preclinical studies
are submitted to the FDA as part of an Investigational New Drug Application or
IND. Once the IND is effective, human clinical trials may be conducted. The
results of the clinical trials are submitted to the FDA as part of a NDA.
Following review of the NDA, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
2. FDA Manufacturing Approval:
Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. All manufacturing facilities and
processes must comply with good manufacturing practices, or GMP, regulations
prescribed by the FDA. All manufacturers must, among other things, pass
manufacturing plant inspections and provide records of detailed manufacturing
processes. Among other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality
standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a
designated level.
3. Ongoing FDA Oversight:
We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized. Among other things, the FDA may:
. require additional submissions if there are any modifications to the
drug product including, for example, any changes in manufacturing
process, labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects
of approved drug products; and
. enforce conditional approvals that restrict the commercial
applications of a drug product.
Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a
one-time basis for applications for approval, and on an annual basis for
manufacturing and marketing of prescription drugs.
4. Other Regulatory Bodies:
We are also subject to regulation by other regulatory authorities,
including the Occupational Safety and Health Administration, the Environmental
Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement
Agency and the United States Department of Agriculture, and to regulation under
the Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other regulatory statutes.
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Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the FDA
prior to marketing the product in those countries. The time required to obtain
foreign approvals may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local
regulations or additional fees. Efforts are continually underway to reform
federal regulation of drug products. Although some of these changes could
streamline and otherwise benefit development, marketing and related requirements
for drugs, others could increase regulatory requirements.
Patent and Proprietary Rights; Licensed Technology
1. Patents:
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications in
the scientific or patent literature lag behind actual discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the
technology;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against
allegations of infringement of third-party patents;
. our issued patents will be held valid in court; or
. an adverse outcome in a suit would not subject us to significant
liabilities to third parties, require rights to be licensed from third
parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
22
<PAGE>
2. Potential Ownership Disputes:
There may be disputes arising as to the ownership of our technology. Most
of our research and development personnel previously worked at other
biotechnology companies, pharmaceutical companies, universities, or research
institutions. These entities may raise questions as to when technology was
developed, and assert rights to the technology. These kind of disputes have
occurred in the past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants are
operating when they make certain discoveries. We may not prevail in any such
disputes.
3. Other Intellectual Property:
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors. We
may find that these agreements will be breached, or that our trade secrets have
otherwise become known or independently developed or discovered by our
competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties on
sales of any products which are covered by patent claims. If we are unable to
pay the royalties we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our rights.
Competition
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense systems
is being conducted by others. Many companies are also currently involved in
research and development activities focused on the pathogenesis of disease, and
the competition among companies attempting to find genes responsible for disease
is intense. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources. We may
also face competition from companies using different or advanced techniques that
could render our products obsolete.
We expect technological developments in the biopharmaceutical field to
occur at a rapid rate and expect competition to intensify as advances in this
field are made. Accordingly, we must continue to devote substantial resources
and efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that have
significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining regulatory
approvals of such products. Some of these companies may be in advanced phases of
clinical testing of various drugs that may be competitive with our proposed
products.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology. In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.
Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain advantages over LOCILEX(TM) Cream. In addition, we may be
unable to manufacture LOCILEX(TM) Cream at a cost which will allow it
23
<PAGE>
to be sold at a competitive price relative to oral antibiotics or other topical
antibiotics that may be used for this indication.
Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their interests.
In the cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.
OUR EXECUTIVE OFFICERS
Our current executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael R. Dougherty.................... 42 President, Chief Executive Officer and
Chief Financial Officer
Roy C. Levitt, M.D...................... 46 Executive Vice President and Chief
Operating Officer
Michael A. Zasloff, M.D., Ph.D.......... 54 Vice Chairman and Executive Vice President
Kenneth J. Holroyd, M.D................. 41 Senior Vice President
</TABLE>
Mr. Dougherty has served as our President and Chief Executive Officer since
August 1998. Mr. Dougherty served as Executive Vice President from March 1995
through August 1998, and as a Director since August 1997. From August 1993, when
he joined us, until March 1995, Mr. Dougherty served as Senior Vice President.
Mr. Dougherty has also served as our Chief Financial Officer since August 1993.
Prior to joining us, Mr. Dougherty served in the following capacities at
Centocor, Inc. (a biopharmaceutical company): Senior Vice President, Chief
Financial Officer and Treasurer, from February 1992 to August 1993, Vice
President Corporate Finance from May 1990 to February 1992 and Treasurer from
June 1986 to May 1990.
Dr. Levitt has served as our Executive Vice President and Chief Operating
Officer since August 1998. Dr. Levitt was appointed our head of Research and
Development, and a Director in August 1997. Dr. Levitt has served as Executive
Vice President since joining us on a full-time basis in January 1996. Prior to
joining, Dr. Levitt served as a consultant to Magainin beginning in 1995. Dr.
Levitt served as a faculty member at Johns Hopkins University in the Department
of Anesthesiology and Critical Care Medicine, from 1986 to 1995, in Neurological
Surgery from 1995 to 1996 and in the Department of Environmental Health Sciences
in the Johns Hopkins School of Public Health and Hygiene from 1988 to 1996.
Dr. Zasloff has served as our Executive Vice President since July 1992. In
July 1996, Dr. Zasloff was appointed Vice Chairman of the Board. From 1988 until
Dr. Zasloff joined us on a full-time basis in July 1992, Dr. Zasloff was our
Chief Scientific Advisor and served as the Charles E.H. Upham Professor,
Department of Pediatrics and Genetics, University of Pennsylvania School of
Medicine, and Chief, Division of Human Genetics and Molecular Biology, The
Children's Hospital of Philadelphia. From 1982 until 1988, Dr. Zasloff was
Chief, Human Genetics Branch, National Institutes of Child Health and Human
Development, National Institutes of Health. Dr. Zasloff currently also serves as
Adjunct Professor, Department of Human Genetics and Orthopedics, University of
Pennsylvania School of Medicine.
Dr. Holroyd has served as Senior Vice President, Clinical Research and
Regulatory Affairs since June 1998. Dr. Holroyd has held various positions,
including Vice President of Respiratory Discovery Research, Product Development
and Business Development, since joining us in February 1997. Prior to joining
us, Dr. Holroyd was a faculty member and head of respiratory care services at
Johns Hopkins University School of Medicine and Hospital in the Department of
Anesthesiology and Critical Care Medicine. Dr. Holroyd earned his M.D. from
Johns Hopkins in 1984 and completed his residency training at Johns Hopkins
serving as chief resident of the Osler Medical Service and at the National
Heart, Lung and Blood Institute.
24
<PAGE>
Officers are elected or appointed by the Board of Directors to serve until
the appointment or election and qualification of their successors or their
earlier termination or resignation.
EMPLOYEES
As of December 31, 1999, we had 43 full-time employees. No employees are
covered by collective bargaining agreements, and we consider relations with our
employees to be good.
Item 2. PROPERTIES
We lease an aggregate of approximately 26,000 square feet of space in
Plymouth Meeting, Pennsylvania for office and laboratory space. Our leases
expire in 2001 and 2002, and provide for minimum annual payments of
approximately $427,000 in 2000 and annual increases thereafter. We sublease
approximately 5,000 square feet and expect offsetting minimum annual sub-lease
payments of $119,000 in 2000.
Item 3. LEGAL PROCEEDINGS
We are not a party to any material litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Magainin Pharmaceuticals Inc. common stock trades on The Nasdaq Stock
Market(R) under the symbol MAGN. The quarterly range of high and low closing
sales prices of our common stock, as reported on the Nasdaq National Market, are
shown below.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 High Low
---------------------------- ---- ---
<S> <C> <C>
1st Quarter........................... $ 4.44 $ 1.44
2nd Quarter........................... $ 2.56 $ 1.50
3rd Quarter........................... $ 3.69 $ 1.00
4th Quarter........................... $ 2.25 $ 0.94
Year Ended December 31, 1998 High Low
---------------------------- ---- ---
1st Quarter........................... $ 8.75 $ 5.38
2nd Quarter........................... $ 8.19 $ 4.38
3rd Quarter........................... $ 6.00 $ 2.31
4th Quarter........................... $ 3.88 $ 2.38
</TABLE>
Dividends
We have not paid any cash dividends since our inception, and we do not
anticipate paying any cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings, if any, to
finance the development of our business.
Number of Holders of Common Stock
At February 23, 1999, there were approximately 330 stockholders of record
and approximately 5,600 beneficial owners of our common stock.
26
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data. The
selected financial data is derived from, and is qualified by reference to, our
financial statements included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (In thousands, except per share amounts)
Revenues:...........................
Contract and government grant..... $ -- $ -- $ 10,088 $ 150 $ 2,056
Related party contract............ -- -- -- -- 280
--------- --------- --------- --------- ----------
-- -- 10,088 150 2,336
--------- --------- --------- --------- ----------
Costs and expenses:
Research and development............ 9,876 21,456 22,875 22,326 18,160
General and administrative.......... 2,870 3,292 3,246 3,488 3,137
Charge for stock issuance relating to
royalty buyout.................... -- -- -- 7,080 --
--------- --------- --------- --------- ----------
12,746 24,748 26,121 32,894 21,297
--------- --------- --------- --------- ----------
Loss from operations.................. (12,746) (24,748) (16,033) (32,744) (18,961)
Interest income....................... 755 1,640 1,770 2,172 1,778
Interest expense...................... (225) (196) (118) (48) (32)
--------- --------- --------- --------- ----------
Net loss.............................. $ (12,216) $ (23,304) $ (14,381) $ (30,620) $ (17,215)
========= ========= ========= ========= ==========
Net loss per share--basic and
diluted............................ $ (0.52) $ (1.05) $ (0.73) $ (1.71) $ (1.17)
========= ========= ========= ========= ==========
Weighted average shares outstanding... 23,706 22,235 19,679 17,938 14,696
========= ========= ========= ========= ==========
December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Balance Sheet Data: (In thousands)
Cash and investments.................. $ 10,644 $ 22,871 $ 39,061 $ 33,340 $ 43,666
Working capital....................... 7,608 11,897 33,073 28,276 30,429
Total assets.......................... 12,731 25,891 42,444 36,376 45,727
Total liabilities..................... 6,179 11,211 7,574 6,433 4,534
Accumulated deficit................... (145,144) (132,928) (109,624) (95,243) (64,623)
Stockholders' equity.................. 6,552 14,680 34,870 29,943 41,193
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these include statements relating to present or anticipated scientific progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financing and
collaborations, personnel, manufacturing requirements and capabilities, and
other statements regarding matters that are not historical facts or statements
of current condition.
27
<PAGE>
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our filings with the SEC. This discussion is provided as permitted
by the Private Securities Litigation Reform Act of 1995.
GENERAL
We are a biopharmaceutical company with research and development efforts in
anti-angiogenesis, respiratory genomics and infectious disease.
Since commencing operations in 1988, we have not generated any revenue from
product sales, and we have funded operations primarily from the proceeds of
public and private placements of securities. We have incurred a loss in each
year since our inception, and we expect to incur substantial additional losses
for at least the next several years. We expect that losses may fluctuate, and
that such fluctuations may be substantial. At December 31, 1999, our accumulated
deficit was approximately $145,100,000. We will need to raise additional funds
in the future to continue our operations.
RESULTS OF OPERATIONS
Revenues
We have received no revenues from product sales. Revenues recorded to date
have consisted principally of revenues recognized under collaborations with
corporate partners. We recorded revenue of $10,000,000 in 1997 reflecting the
receipt of payments under the SmithKline Agreement entered into in February 1997
for LOCILEX(TM) Cream. We had hoped to commercialize LOCILEX(TM) Cream in the
near-term. However, with the FDA's decision not to approve LOCILEX(TM) Cream,
near-term commercialization will not occur, and we will generate no revenues
from LOCILEX(TM) Cream in the near future. We have no currently existing
collaborations that will result in the realization of research and development
revenues.
Research and Development Expenses
Research and development expenses decreased in the year ended December 31,
1999 as compared to the same period a year ago, due to reductions in
manufacturing development, clinical and regulatory costs, and personnel
expenses, principally due to decreased development activity relating to
LOCILEX(TM) Cream. Research and development expenses decreased slightly in the
year ended December 31, 1998 as compared to those in the year ended December 31,
1997, due principally to reductions in clinical and manufacturing expenses.
The level of research and development expenses in future periods will
depend principally upon the progress of our research and development programs
and our capital resources.
General and Administrative Expenses
General and administrative expenses consist principally of personnel costs
and professional fees and have decreased in 1999 as compared to the prior year
due principally to a reduction in personnel expenses. General and
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<PAGE>
administrative expenses in the year ended December 31, 1998 were comparable to
those in the year ended December 31, 1997.
Other Income and Expense
Interest income decreased during the years ended December 31, 1999 and 1998
as compared to the prior years, due to lower investment balances. The increase
in interest expense for the years ended December 31, 1999 and 1998, as compared
to the prior years, is due to higher debt balances.
Net Loss
Our goal is to conduct significant research, pre-clinical development,
clinical testing and manufacturing activities over the next several years. We
expect that these activities, together with projected general and administrative
expenses, will result in continued and significant losses.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash and investments were $10,644,000 at December 31, 1999 as compared to
$22,871,000 at December 31, 1998. The primary use of cash was to finance our
operations.
Since inception, we have funded our operations primarily from the proceeds
of public and private placements of securities, including:
. $17,080,000 raised from our initial public offering in December 1991;
. $21,469,000 raised from a public offering completed in February 1993;
. $18,023,000 raised from a private placement completed in October 1993;
. $32,627,000 raised from a public offering completed in August 1995;
. $11,932,000 raised from a private placement completed in August 1996;
. $19,172,000 raised from a public offering completed in December 1997;
. $ 2,000,000 raised from a private placement completed in December
1998; and
. $ 3,915,000 raised from a public offering completed in October 1999.
In addition to the above, we have funded our operations from contract and
grant revenues, interest income and lease and debt financing.
Accounts payable and accrued expenses decreased $7,989,000 to $664,000 at
December 31, 1999, due principally to payments of $4,200,000 to Abbott
Laboratories and the reclassification to long-term of the $2,962,000 obligation
described below. We had an agreement with Abbott providing for the purchase of
approximately $10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream did not occur, we renegotiated this agreement with
Abbott in 1999, paying Abbott $4,200,000 and receiving partial delivery of
material. An additional $3,400,000 is due to Abbott and payable if we receive in
excess of $10,000,000 of additional funds in any year beginning in 2000, in
which case 15% of such excess over $10,000,000 shall be payable to Abbott. We
have no further purchase commitments to Abbott, and Abbott has no further supply
requirements to us.
Long-term liabilities increased by $2,962,000 at December 31, 1999
reflecting the present value of additional amounts due to Abbott under certain
conditions related to the renegotiation of a our manufacturing agreement for
LOCILEX(TM) Cream.
29
<PAGE>
Under the terms of our $2,500,000 note payable, we make monthly interest-
only payments at an annual rate of 7.375%, with principal due in June 2000. We
maintain cash and investments of $2,770,000 as collateral for the note payable.
In October, 1999 we completed a public offering of 4,000,000 shares of
common stock. Net proceeds from the offering totaled approximately $3.9 million.
In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline has
paid us $10,000,000 under this agreement, which we received in 1997. We had
hoped to commercialize LOCILEX(TM) Cream in the near-term. However, with the
FDA's decision, near-term commercialization of LOCILEX(TM) Cream will not occur,
and we will generate no revenues from LOCILEX(TM) Cream in the near future. The
SmithKline Agreement also gives SmithKline rights to terminate the arrangement,
and, under certain conditions, the right to negotiate for rights to another
Magainin product development candidate.
In December 1998, we entered into a collaborative research and option
agreement with Genentech relating to a protein therapeutic in asthma. Under this
agreement, we jointly conducted a collaborative program to evaluate the utility
of a blocking antibody to IL9 in suppressing the asthmatic response. Genentech
made an initial equity investment of $2,000,000 in our company in 1998, and has
an option to enter into a development and commercialization agreement with our
company. Any such future development and commercialization agreement could
provide for payments to us of up to $35,000,000, upon terms to be negotiated,
and royalty payments on sales of products developed by Genentech in the field.
We are currently in discussions with Genentech as to the continuation and
expansion of this program. Genentech may choose not to enter into an agreement,
or we may not be able to agree upon terms for an agreement.
We maintained cash and investments of $10,000,000 at December 31, 1999.
At December 31, 1999, we had current liabilities of $3,200,000. In the absence
of raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond 2000. We will need to raise
substantial additional funds in the future to continue our research and
development programs and to commercialize our potential products. If we are
unable to raise such funds, we may be unable to complete our development
activities for any of our proposed products.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds, and may be unable to obtain
sufficient funding in the future on acceptable terms. If we cannot obtain
funding, we will need to delay, scale back or eliminate research and development
programs or enter into collaborations with third parties to commercialize
potential products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
Our capital expenditure requirements will depend upon numerous factors,
including the progress of our research and development programs, the time and
cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions of
products, technologies and companies. We had no significant capital commitments
as of December 31, 1999.
Recently Issued Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, SAB 101. SAB 101 summarizes certain of the staff's views in applying
30
<PAGE>
generally accepted accounting principles to revenue recognition in financial
statements, including the recognition of non-refundable fees received upon
entering into arrangements. We are in the process of evaluating SAB 101 and its
effects on our financial statements and current revenue recognition policies.
Year 2000
We experienced no interruptions relating to due to Year 2000 (Y2K) computer
problems during 1999 or subsequently. We incurred less than $100,000 in costs to
replace and upgrade certain computers and systems that were deemed potentially
at risk to Year 2000 problems.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
available funds for investment. We do not currently have any significant direct
foreign currency exchange rate risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth beginning on page F-1
hereof in the Table of Contents for Part II - Financial Information.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item concerning directors is incorporated
herein by reference from our Proxy Statement for the 2000 Annual Meeting of
Shareholders. Set forth in Part I - Item 1 is the information required by this
item concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The information required by this item is set forth in the Table of Contents
to Financial Statements on page F-1 hereof.
Financial Statement Schedules
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the Financial Statements or Notes
thereto.
Reports on Form 8-K
None.
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<PAGE>
Exhibits
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically,
together with a reference to the filing indicated by footnote.
Exhibit No.
- ----------
3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.1)(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant (Exhibit 3.2)(11)
3.3 By-laws of the Registrant (Exhibit 3.2)(2)
3.4 * Amended and Restated By-laws of the Registrant
4.1 Specimen copy of stock certificate for shares of Common Stock of
the Registrant (Exhibit 4.1)(3)
10.1 # 1990 Stock Option Plan of the Registrant (Exhibit 10.1)(2)
10.2 # 1992 Stock Option Plan of the Registrant, as amended (4)
10.3 # 1998 Equity Compensation Plan (13)
10.4 # Stock Option Agreement with Jay Moorin (Exhibit 10.24)(3)
10.5 # Amendment to Stock Option Agreement with Jay Moorin (Exhibit
10.4)(1)
10.6 # Form of Stock Option Agreement under Stock Option Plans (Exhibit
4.6)(2)
10.7 # Employment Agreement with Michael A. Zasloff, M.D., Ph.D.
(Exhibit 10.23)(3)
10.8 # Amendment of Employment Agreement with Michael A. Zasloff, M.D.,
Ph.D. (Exhibit 10.9)(3)
10.9 # Employment Agreement with Michael R. Dougherty (Exhibit 10.26)(7)
10.10 # Employment Agreement with Roy C. Levitt, M.D. (Exhibit
10.24)(5)(8)
10.11 # Employment Agreement with Kenneth J. Holroyd, M.D. (Exhibit
10.12)(14)
10.12 #* Form and Schedule of Stock Awards to Executive Officers (Exhibit
10.36)(14)
10.13 Lease with respect to Plymouth Meeting, Pennsylvania offices and
laboratories (Exhibit 10.16)(2)
10.14 Lease with respect to Plymouth Meeting, Pennsylvania office
(Exhibit 10.13)(12)
10.15 Amendment to lease with respect to Plymouth Meeting,
Pennsylvania offices and laboratories (Exhibit 10.16)(14)
10.16 Patent License Agreement and Sponsored Research Agreement with
The Children's Hospital of Philadelphia (Exhibit 10.15)(2)
10.17 License Agreement with Multiple Peptide Systems, Inc. (Exhibit
10.12)(2)
10.18 Second Amendment to License Agreement with Multiple Peptide
Systems, Inc. (Exhibit 10.30)(10)
10.19 Form of Credit Agreement, including form of Promissory Note and
Warrant (Exhibit 10.22)(2)
10.20 Form of Amendment to Credit Agreement Warrant (Exhibit 10.18)(6)
10.21 Assignment Agreement between Magainin Pharmaceuticals Inc., Roy
C. Levitt, M.D. and GeneQuest, Inc. (Exhibit 10.25)(5)(8)
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<PAGE>
Exhibit No.
- ----------
10.22 Form of Purchase Agreement relating to the issuance by Magainin
Pharmaceuticals Inc. of units consisting of shares of Magainin
Pharmaceuticals Inc. Common Stock and warrants to purchase
shares of Common Stock (Exhibit 10.1)(9)
10.23 Form of Warrant to purchase shares of Magainin Pharmaceuticals
Inc. Common Stock (Exhibit 10.2)(8)
10.24 Development, Supply and Distribution Agreement, effective as of
February 12, 1997 with SmithKline Beecham Corporation (Exhibit
10.29)(5)(11)
10.25 * Collaborative Research and Option Agreement with Genentech, Inc.,
effective as of December 30, 1998 (Exhibit 10.32)(15)
10.26 Stock Purchase Agreement between Magainin Pharmaceuticals Inc.
and Genentech, Inc., dated December 30, 1998 (Exhibit 10.33)(15)
10.27 Settlement and Termination Agreement between Abbott Laboratories
Inc. and Magainin Pharmaceuticals Inc., effective September 8,
1999 (Exhibit 99.1)(16)
23 * Consent of KPMG LLP
24 * Power of Attorney (included on signature page of this Annual
Report on Form 10-K)
27 * Financial Data Schedule
____________________
Explanation of Footnotes to Listing of Exhibits
* Filed herewith.
# Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended June 30, 1992 filed with the Securities and Exchange Commission
on September 24, 1992.
(2) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form
S-1 filed with the Securities and Exchange Commission on October 24,
1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement (No. 33-43579) on Form S-1 filed with the Securities and
Exchange Commission on November 27, 1991.
(4) Filed as Exhibit A to the Proxy Statement for the 1996 Annual Meeting
of Stockholders.
(5) Portions of this Exhibit were omitted and filed separately with the
Securities and Exchange Commission pursuant to an order granting
confidential treatment.
(6) Filed as an Exhibit to the Transition Report on Form 10-K for the year
ended December 31, 1993 filed with the Securities and Exchange
Commission on March 9, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1994 filed with the Securities and Exchange
Commission on March 31, 1995.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1995 filed with the Securities and Exchange
Commission on March 29, 1996.
(9) Filed as an Exhibit to Registration Statement (No. 333-09927) on Form
S-3 filed with the Securities and Exchange Commission on August 9,
1996.
(10) Filed as an Exhibit to the Form 10-Q for the quarter ended September
30, 1996 filed with the Securities and Exchange Commission on November
14, 1996.
34
<PAGE>
(11) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1996 filed with the Securities and Exchange
Commission on March 31, 1997.
(12) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1997, filed with the Securities and Exchange
Commission on March 13, 1998.
(13) Filed as Exhibit A to the Proxy Statement for the 1998 Annual Meeting
of Stockholders.
(14) Filed as an Exhibit to the Annual Report on Form 10-K/A for the year
ended December 31, 1998, filed with the Securities and Exchange
Commission on March 19, 1999
(15) Filed as an Exhibit to the Annual Report on Form 10-K/A for the year
ended December 31, 1998, filed with the Securities and Exchange
Commission on August 6, 1999
(16) Filed as an Exhibit to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 8, 1999.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAGAININ PHARMACEUTICALS INC.
By: /s/ Michael R. Dougherty
--------------------------------
Michael R. Dougherty
President, Chief Executive Officer,
Chief Financial Officer and Director
Date: March 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Michael R. Dougherty, President, Chief Executive
Officer and Chief Financial Officer his true and lawful attorney-in-fact, in his
name, place and stead to execute and cause to be filed with the Securities and
Exchange Commission any or all amendments to this report.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Zola P. Horovitz, Ph.D. Chairman and Director March 15, 2000
- ----------------------------------------
Zola P. Horovitz, Ph.D.
/s/ Bernard Canavan, M.D. Director March 15, 2000
- ----------------------------------------
Bernard Canavan, M.D.
/s/ Michael R. Dougherty President, Chief Executive Officer, Chief March 15, 2000
- ----------------------------------------
Michael R. Dougherty Financial Officer and Director (Principal
Executive and Financial Officer)
/s/ Roy C. Levitt, M.D. Executive Vice President, Chief Operating March 15, 2000
- ----------------------------------------
Roy C. Levitt, M.D. Officer and Director
/s/ Charles A. Sanders, M.D. Director March 15, 2000
- ----------------------------------------
Charles A. Sanders, M.D.
/s/ Robert F. Shapiro Director March 15, 2000
- ----------------------------------------
Robert F. Shapiro
/s/ James B. Wyngaarden, M.D. Director March 15, 2000
- ----------------------------------------
James B, Wyngaarden, M.D.
/s/ Michael A. Zasloff, M.D. Vice Chairman, Executive Vice President March 15, 2000
- ----------------------------------------
Michael A. Zasloff, M.D., Ph.D. and Director
</TABLE>
36
<PAGE>
MAGAININ PHARMACEUTICALS INC.
TABLE OF CONTENTS
PART II - Financial Information
Item 8. Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statements of Changes in Stockholders' Equity and Comprehensive Loss...... F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.:
We have audited the accompanying balance sheets of Magainin Pharmaceuticals Inc.
as of December 31, 1999 and 1998, and the related statements of operations,
changes in stockholders' equity and comprehensive loss and cash flows for each
of the years in the three-year period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magainin Pharmaceuticals Inc.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Princeton, New Jersey
February 11, 2000
F-2
<PAGE>
MAGAININ PHARMACEUTICALS INC.
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 2,435 $ 4,495
Short-term investments (NOTE 6)............................................... 8,209 18,376
Prepaid expenses and other.................................................... 128 179
------------ -------------
Total current assets........................................................ 10,772 23,050
Fixed assets, net................................................................ 1,793 2,765
Other assets..................................................................... 166 76
------------ -------------
Total assets............................................................ $ 12,731 $ 25,891
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (NOTE 5)................................ $ 664 $ 8,653
Note payable (NOTE 6)......................................................... 2,500 2,500
------------- -------------
Total current liabilities................................................... 3,164 11,153
Accrued development expense - long-term (NOTE 12)................................ 2,962 --
Deferred rent.................................................................... 53 58
------------- --------------
Total liabilities....................................................... 6,179 11,211
------------- --------------
Commitments, contingencies and other matters
Stockholders' equity (NOTE 7):
Preferred stock--$.001 par value; shares authorized--9,211; none issued
Common stock--$.002 par value; shares authorized--45,000; shares issued
and outstanding--26,943 and 22,910, respectively.............................. 54 46
Additional paid-in capital....................................................... 151,655 147,553
Accumulated other comprehensive income--unrealized gain (loss) on investments.... (13) 9
Accumulated deficit.............................................................. (145,144) (132,928)
------------ -------------
Total stockholders' equity.................................................. 6,552 14,680
------------ -------------
Total liabilities and stockholders' equity.............................. $ 12,731 $ 25,891
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
---------------------------------
1999 1998 1997
-------- -------- --------
Revenues........................... $ -- $ -- $ 10,088
Costs and Expenses:
Research and development........ 9,876 21,456 22,875
General and administrative...... 2,870 3,292 3,246
-------- -------- --------
12,746 24,748 26,121
-------- -------- --------
Loss from operations............... (12,746) (24,748) (16,033)
Interest income.................... 755 1,640 1,770
Interest expense................... (225) (196) (118)
-------- -------- --------
Net loss........................... $(12,216) $(23,304) $(14,381)
Net loss per share--basic and
diluted............................ $ (0.52) $ (1.05) $ (0.73)
======== ======== ========
Weighted average shares
outstanding..................... 23,706 22,235 19,679
======== ======== ========
See accompanying notes to financial statements.
F-4
<PAGE>
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Additional Compre- Stock-
------------------
Number Paid-in hensive Accumulated holders
of Shares Amount Capital Income (Loss) Deficit Equity
--------- ------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... 19,364 $ 39 $ 125,134 $ 13 $ (95,243) $ 29,943
Common stock issued pursuant to
public offering................... 2,587 5 19,167 -- -- 19,172
Common stock issued, exercise of
options and warrants.............. 29 -- 143 -- -- 143
Comprehensive loss
Net loss...................... -- -- -- -- (14,381) (14,381)
Carrying value adjustment..... -- -- -- (7) -- (7)
------- ----- --------- ------ ----------- ---------
Total comprehensive loss............ -- -- -- -- -- (14,388)
------- ----- --------- ------ ----------- ---------
Balance at December 31, 1997........... 21,980 44 144,444 6 (109,624) 34,870
Common stock issued pursuant to
research and option agreement..... 620 1 1,999 -- -- 2,000
Fair value of shares issued to
contract manufacturer............. 125 -- 859 -- -- 859
Exercise of stock options, and
compensation expense under
stock, warrant and option awards.. 185 1 251 -- -- 252
Comprehensive loss
Net loss...................... -- -- -- -- (23,304) (23,304)
Carrying value adjustment..... -- -- -- 3 -- 3
------- ----- --------- ------ ----------- ---------
Total comprehensive loss............ -- -- -- -- -- (23,301)
------- ----- --------- ------ ----------- ---------
Balance at December 31, 1998........... 22,910 46 147,553 9 (132,928) 14,680
Exercise of stock options, issuance
of stock and compensation
expense under stock awards........ 33 -- 195 -- -- 195
Common stock issued pursuant
to public offering................ 4,000 8 3,907 -- -- 3,915
Comprehensive loss
Net loss...................... -- -- -- -- (12,216) (12,216)
Carrying value adjustment..... -- -- -- (22) -- (22)
------- ----- --------- ------ ----------- ---------
Total comprehensive loss............ -- -- -- -- -- (12,238)
------- ----- --------- ------ ----------- ---------
Balance at December 31, 1999........... 26,943 $ 54 $ 151,655 $ (13) $ (145,144) $ 6,552
====== ===== ========= ====== ============ =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss........................................................ $ (12,216) $ (23,304) $ (14,381)
Adjustments to reconcile net loss to net cash used in
operating activities:
Fair value of stock, options and warrants issued.............. -- 859 --
Depreciation and amortization................................. 1,004 1,140 976
Amortization of investment discounts/premiums................. (493) (782) (752)
Compensation expense under stock awards....................... 195 114 --
Changes in operating assets and liabilities:
Prepaid expenses and other.................................... (39) 298 (29)
Accounts payable and accrued expenses......................... (7,989) 2,709 799
Accrued development expenses - long-term...................... 2,962 -- --
Deferred rent................................................. (5) (38) (31)
----------- ----------- -----------
Net cash used in operating activities.............................. (16,581) (19,004) (13,418)
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchase of investments......................................... (31,780) (45,317) (72,313)
Proceeds from maturities of investments......................... 41,418 66,300 65,752
Proceeds from sale of investments............................... 1,000 -- --
Capital expenditures............................................ (32) (1,081) (1,294)
----------- ----------- -----------
Net cash provided by (used in) investing activities................ 10,606 19,902 (7,855)
----------- ----------- -----------
Cash Flows From Financing Activities:
Payments of notes payable....................................... (2,500) -- --
Proceeds from notes payable..................................... 2,500 1,000 500
Payments on capitalized equipment leases........................ -- (28) (127)
Net proceeds from sale of stock and exercise of options and
warrants........................................................ 3,915 2,138 19,315
----------- ----------- -----------
Net cash provided by financing activities.......................... 3,915 3,110 19,688
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............... (2,060) 4,008 (1,585)
Cash and cash equivalents at beginning of period................... 4,495 487 2,072
----------- ----------- -----------
Cash and cash equivalents at end of period......................... $ 2,435 $ 4,495 $ 487
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid during the period for interest........................... $ 223 $ 185 $ 106
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
MAGAININ PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company
Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company with research and development
efforts in anti-agniogenesis, respiratory genomics and infectious disease. The
Company is managed and operated as one business. The entire business is
comprehensively managed by a single management team that reports to the Chief
Executive Officer. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location, and does not
have separately reportable segments as defined by SFAS No. 131.
2. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and related notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.
Investments - Investments purchased with a maturity of more than three
months, and which mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by Statement of Financial
Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at market
value with unrealized gains and losses reported as a separate component of
stockholders' equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method and are included
in interest income.
Fixed Assets and Depreciation - Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets including: three (3) years for computers/software, five (5) years for
laboratory and office equipment and seven (7) years for furniture and fixtures.
Equipment under capital leases and leasehold improvements are amortized using
the straight-line method over the term of the respective lease, or their
estimated useful lives, whichever is shorter. Expenditures for maintenance and
repairs are charged to expense as incurred.
Revenue Recognition - Any revenues from research and development
arrangements are recognized pursuant to the terms of the related agreements,
either as work is performed, or as milestones are achieved. In December 1999,
the staff of the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, SAB 101. SAB 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements, including
the recognition of non-refundable fees received upon entering into arrangements.
The Company is in the process of evaluating SAB 101 and its effects on the
financial statements and current revenue recognition policies.
Research and Development - Research and development costs are expensed as
incurred.
Patent Costs - Patent-related costs are expensed as incurred.
F-7
<PAGE>
Lease Expense - Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized over
the lease term.
Stock Based Compensation - The Company accounts for stock-based employee
compensation under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Effective January
1, 1996, the Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation".
Income Taxes - The Company accounts for income taxes using the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period in which tax rate changes
are enacted.
Loss Per Share - The Company calculates loss per share under the provisions
of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual presentation
of "basic" and "diluted" loss per share on the face of the income statement.
Basic loss per share is computed by dividing income (loss) by the weighted
average number of shares of common stock outstanding during each period. Diluted
loss per share includes the dilutive effect, if any, from the potential exercise
or conversion of securities, such as stock options and warrants, which would
result in the issuance of shares of common stock. Basic and diluted loss per
share amounts are the same because the Company reported a loss for all periods
presented.
Comprehensive Income - SFAS No. 130, "Reporting Comprehensive Income"
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income consists of reported net income or loss and
"other comprehensive income" (i.e. other gains and losses affecting
stockholders' equity that, under generally accepted accounting principals, are
excluded from net income or loss as reported on the statement of operations).
With regard to the Company, other comprehensive income consists of unrealized
gains and losses on marketable securities. The adoption of SFAS No. 130 affects
only the presentation of the Company's balance sheet, and does not affect the
Company's reported results of operations or cash flows.
3. Investments
The Company invests in securities of the U.S. Treasury and U.S. government
agencies. Excess cash is invested on a short-term basis in U.S. government based
money market funds. The Company had an unrealized loss of $13,000, and an
unrealized gain of $9,000 at December 31, 1999 and 1998 respectfully. The
Company has not realized any losses on its investments.
4. Fixed Assets
Fixed assets are stated at cost and are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Laboratory and office equipment........................... $ 3,298 $ 3,354
Leasehold improvements.................................... 2,908 2,886
------------- -------------
Total............................................ 6,206 6,240
Less accumulated depreciation and amortization............ (4,413) (3,475)
------------- -------------
$ 1,793 $ 2,765
============= =============
</TABLE>
F-8
<PAGE>
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Accounts payable $ 164 $ 179
Clinical and regulatory costs 161 448
Manufacturing development costs 40 7,171
Preclinical costs 17 117
Professional fees 226 253
Other 56 485
------------- -------------
$ 664 $ 8,653
============= ==============
</TABLE>
Accrued manufacturing development costs consist primarily of amounts
related to various third-party manufacturing agreements (See NOTE 12).
6. Note Payable
The Company refinanced its $2,500,000 note payable in the second quarter of
1999. Under the terms of this arrangement, the Company makes monthly
interest-only payments at an annual rate of 7.375%, with principal due in June
2000. The Company maintains cash and investments of approximately $2,770,000 as
collateral for the note payable. The Company's current intention is to refinance
this loan prior to its maturity.
7. Stockholders' Equity
The Company's certificate of incorporation provides the board of directors
the power to issue shares of preferred stock without stockholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of our common stock, and the board of directors has the power
to determine these voting rights.
In December 1997, the Company consummated a public offering of 2,587,500
shares of common stock with proceeds to the Company (after underwriting
discounts and offering expenses) of approximately $19,172,000.
In January 1998, pursuant to an arrangement with a contract manufacturer,
the Company issued to such manufacturer 125,000 shares of common stock with a
fair value of $6.125 per share. In connection therewith, the Company recorded a
non-cash charge to earnings of $859,000.
In December 1998, pursuant to a collaboration, the Company sold 620,540
shares of common stock to Genentech, Inc. ("Genentech"), with proceeds to the
Company of approximately $2,000,000.
In October 1999, the Company completed a public offering of 4,000,000
shares of its common stock with proceeds to the Company (after offering
expenses) of approximately $3,915,000.
Warrants - Under a 1991 credit agreement with certain stockholders, the
Company granted warrants to the lenders to purchase an aggregate of 250,000
shares of common stock at $8 per share. These warrants expire in 2001. At
December 31, 1999, 229,739 of these warrants are outstanding.
In connection with its August 1996 private placement, the Company issued
common stock, together with warrants to purchase 1,011,896 shares of the
Company's common stock. The warrants contain provisions to decrease the exercise
price, and increase shares, under certain circumstances. Such circumstances
include the issuance of shares of common stock by the Company for a
consideration per share less than the exercise price of the warrants, and the
issuance by the Company of securities convertible into shares of common stock
for which the
F-9
<PAGE>
exercise or conversion price is less than the exercise price of the warrants.
Warrants to purchase 1,158,210 shares of common stock at prices ranging from
$5.35 to $7.37 per share are currently exercisable.
Stock option plans - In May 1991, the stockholders approved the 1990 Stock
Option Plan (the "1990 Plan") which provides for the granting of options for the
purchase of up to 160,000 shares of common stock. In May 1996, the stockholders
approved the amended 1992 Stock Option Plan (the "1992 Plan") which provides for
the granting of options for the purchase of up to 2,500,000 shares of common
stock. In May 1998, the stockholders approved the 1998 Equity Compensation Plan
(the "1998 Plan") which provides for the granting of options, and stock awards,
of up to 1,500,000 shares of common stock.
The plans provide for the granting of incentive stock options and
nonqualified stock options and are administered by a committee of the Board of
Directors. The committee has the authority to determine the term during which an
option may be exercised (provided that no option may have a term of more than 10
years), the exercise price of an option, and the rate at which options may be
exercised. Incentive stock options may be granted only to employees of the
Company. Nonqualified stock options may be granted to employees, directors or
consultants of the Company. For nonqualified stock options under the 1992 and
1998 Plans and incentive stock options, the exercise price can not be less than
the fair market value of the underlying common stock on the date of the grant.
In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 595,612 shares of common stock
are issuable upon exercise of outstanding options granted pursuant to written
agreements. The exercise price for these options was set by the Board of
Directors, or a committee designated by the Board, based upon an evaluation of
the fair market value of the Company's common stock on the date of grant.
A summary of the status of the Company's stock options as of December 31,
1999, 1998 and 1997, and changes during the years ended on those dates, is
presented below (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- -------------------------- -------------------------
Weighted Average Weighted Average Weighted Average
Options Shares Exercise Price Share Exercise Price Shares Exercise Price
- ------- ------ ---------------- ----- ------------------ ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.. 3,588 $ 5.94 2,974 $ 6.33 2,466 $ 6.07
Granted........................... 833 $ 1.96 976 $ 4.29 576 $ 7.51
Exercised......................... (1) $ 0.07 (176) $ 0.78 (29) $ 4.91
Forfeited......................... (758) $ 7.46 (186) $ 8.40 (39) $ 8.46
------ ----- -----
Outstanding at end of year........ 3,662 $ 4.70 3,588 $ 5.94 2,974 $ 6.33
Exercisable at end of year........ 2,141 $ 4.71 2,022 $ 5.76 1,586 $ 4.29
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------------
Weighted Average Shares
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices At 12/31/99 Contractual Life Exercise Price At 12/31/99 Exercise Price
- --------------- ------------ ------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.40 - $ 1.97.... 435 9.6 Years $ 1.11 39 $ 1.04
$ 2.00 - $ 2.97.... 959 4.4 Years $ 2.27 642 $ 2.05
$ 3.25 - $ 4.75.... 938 7.6 Years $ 3.65 455 $ 3.73
$ 5.00 - $ 9.88.... 900 6.6 Years $ 7.21 654 $ 7.40
$ 10.00 - $ 16.75.... 430 6.5 Years $ 10.83 351 $ 10.87
----- -----
$ 0.40 - $ 16.75.... 3,662 6.6 Years $ 4.70 2,141 $ 4.71
</TABLE>
F-10
<PAGE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for options. Accordingly, no compensation cost has been recognized
for employee stock option grants. Had compensation cost for employee stock
option grants been determined based on the fair value at the grant dates for
awards consistent with the method of SFAS No. 123, the Company's net loss and
net loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -------
<S> <C> <C> <C>
Net loss.................................. As reported $ (12,216) $ (23,304) $ (14,381)
Pro forma $ (14,966) $ (26,208) $ (16,649)
Net loss per share - basic and diluted.... As reported $ (0.52) $ (1.05) $ (0.73)
Pro forma $ (0.63) $ (1.18) $ (0.85)
</TABLE>
The resulting effect on pro forma loss and pro forma loss per share
disclosed above is not likely to be representative of the effects on a pro forma
basis in future years, because 1999, 1998 and 1997 pro forma results include the
impact of only four, three and two years, respectively, of grants and related
vesting, while subsequent years will include additional years of grants and
vesting. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------
<S> <C> <C> <C>
Range of risk free interest rates...................... 5.0% - 6.4% 4.4% - 5.7% 5.8% - 6.6%
Dividend yield......................................... 0% 0% 0%
Volatility factor...................................... 86% 78% 75%
Expected life of options (in years).................... 6 6 6
Weighted-average fair value
of options granted during the year................... $1.54 $3.04 $5.31
</TABLE>
The 1998 Plan also provides for the issuance of common stock awards, up to
a maximum of 375,000 shares. Such awards shall be made subject to such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as the Compensation Committee may determine. A total
of 178,500 shares have been awarded under the 1998 Plan, vesting over a four
year period from the award date. The cost of these awards will be recognized as
expense over the vesting period. As of December 31, 1999, 31,500 shares have
been issued under this program.
8. Income Taxes
As of December 31, 1999 the Company had approximately $75,700,000 of net
operating loss ("NOL") carry-forwards for federal income tax purposes (expiring
in years 2003 through 2019). In addition, the Company had NOL carryforwards for
state income tax purposes of approximately $38,900,000 (expiring in years 2005
through 2009). Pennsylvania has a $2,000,000 annual limitation on the
utilization of NOL carryforwards, thus the Company is not likely to utilize most
of its state NOL carryforwards. The Company also had approximately $6,100,000 of
research and development tax credits carryforwards available to offset future
federal income tax liability (expiring in years 2005 through 2019). The NOL
carryforward differs from the accumulated deficit principally due to differences
in the recognition of certain expenses between financial and federal tax
reporting.
Under the Tax Reform Act of 1986, the utilization of a corporation's NOL
carryforward and research and development tax credits are limited following a
change in ownership of greater than 50% within a three year period. Due to the
Company's prior equity transactions, the Company's net operating loss and tax
credit carryforwards may be subject to an annual limitation generally determined
by multiplying the market value of the Company on the date of the ownership
change by the federal long-term tax exempt rate. Any amount exceeding the annual
limitation may be carried forward to future years for the balance of the NOL and
tax credit carryforward period.
F-11
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty of the Company's ability to realize the benefit of the deferred
tax asset, the deferred tax assets are fully offset by a valuation allowance at
December 31, 1999 and 1998. The net change in the valuation allowance for
deferred tax assets at December 31, 1999 and 1998 was an increase of $8,400,000
and an increase of $12,000,000, respectively.
During 1999, the Company amended its prior year tax returns from 1995
through 1998 to capitalize research and development costs in order to extend the
life of the net operating losses. The Company expects to continue to capitalize
research and development costs in 1999 and future years. The effect of the
amended returns is an increase in the deferred tax asset for research and
development and a decrease in the deferred tax asset for net operating losses at
December 31, 1999 compared to amounts reported at December 31, 1998.
Significant components of the net deferred tax assets as of December 31,
1999 and 1998 consists of the following (in thousands):
Deferred tax assets: 1999 1998
---------- ----------
Net operating losses $ 30,371 $ 46,534
Research credits 6,132 7,395
Capitalized research and development 30,413 2,748
Accrued expenses and other 1,453 3,247
Depreciation 344 372
---------- ----------
68,713 60,296
Valuation allowance $ (68,713) $ (60,296)
---------- ----------
Deferred tax assets, net $ 0 $ 0
========== ==========
9. Collaborative Agreements
In February 1997, the Company entered into a development, supply and
distribution agreement (the "SmithKline Agreement") in North America with
SmithKline Beecham ("SmithKline") for LOCILEX(TM) Cream. SmithKline has paid the
Company $10,000,000 under this agreement. The Company had hoped to commercialize
LOCILEX(TM) Cream in the near term. However, with the FDA's decision not to
approve LOCILEX(TM) Cream, near term commercialization will not occur, and the
Company will generate no revenues from LOCILEX(TM) Cream in the near future. The
SmithKline Agreement also gives SmithKline rights to terminate the arrangement,
and, under certain conditions, the right to negotiate for rights to another
Magainin product development candidate.
In December 1998, the Company entered into a collaborative research and
option agreement with Genentech Inc. ("Genentech") relating to a protein
therapeutic in asthma. Under this agreement, the Company and Genentech conducted
a collaborative program to evaluate the utility of a blocking antibody to IL9 in
suppressing the asthmatic response. Genentech made an initial equity investment
in the Company of $2,000,000 in 1998, and has an option to enter into a
development and commercialization agreement with the Company. Any such
development and commercialization agreement could provide for payments to the
Company of up to $35,000,000 million, upon terms to be negotiated, and royalty
payments on sales of products developed by Genentech in the field. The Company
is currently in discussions with Genentech as to the continuation and expansion
of this program. Genentech may choose not to enter into an agreement, or the
Company and Genentech may not be able to agree upon terms for an agreement.
F-12
<PAGE>
In August 1994, the Company entered into a collaboration in the nutritional
field with Abbott Laboratories. The Company recorded revenue of $0, $0, $88,000
in the years ended December 31, 1999, 1998 and 1997, respectively, under this
arrangement. This agreement has expired.
The Company has rights under license agreements to certain patents and
patent applications under which the Company expects to owe royalties on sales of
any products which are covered by issued patent claims. Additionally, certain of
these agreements also provide that if the Company elects not to pursue the
commercial development of any licensed technology, or does not adhere to an
acceptable schedule of commercialization, then the Company's exclusive rights to
such technology would terminate. The Company also funds research at certain
institutions, and these relationships may provide the Company with an option to
license any results of the research.
10. 401(K) Plan
The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made through December 31, 1999.
11. Fair Value of Financial Instruments
The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair market value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize on disposition
of the financial instruments. The use of different market assumptions or
estimation methodologies may have an effect on the estimated fair value amounts.
Cash equivalents, accounts payable, accrued expenses and investments are
carried at amounts which reasonably approximate their fair values due to the
short term nature of these instruments. The estimated fair value of the
Company's note payable is estimated to be approximately equal to its carrying
value of $2,500,000 million at December 31, 1999.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1999. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for the
purposes of these financial statements since December 31, 1999, and current
estimates of fair value may differ from the amounts presented herein.
12. Commitments, Contingencies and Other Matters
Rent
The Company has entered into two operating leases for its laboratory and
corporate office facilities. One facility is currently subleased to a third
party. Minimum annual rent payments through 2002 are as follows (in thousands):
Year Ending
December 31,
------------
2000.................................... $ 427
2001................................... 327
2002................................... 299
------
$1,053
======
F-13
<PAGE>
The leases provide for escalations relating to increases in real estate
taxes and certain operating expenses. Under the Company's sub-lease, minimum
annual lease payments are expected to be $119,000 and $10,000, for the years
ended December 31, 2000 and 2001, respectively.
Rent expense was approximately $440,000, $394,000 and $295,000, for the
years ended December 31, 1999, 1998 and 1997, respectively.
Manufacturing
The Company had an agreement with Abbott Laboratories providing for the
purchase of approximately $10,000,000 of bulk drug substance for LOCILEX(TM)
Cream. As FDA approval of LOCILEX(TM) Cream did not occur, the Company
renegotiated this agreement with Abbott in 1999, paying Abbott $4,200,000 and
receiving partial delivery of material. An additional $3,400,000 is due to
Abbott and payable if Magainin receives in excess of $10,000,000 of additional
funds in any year beginning in 2000, in which case 15% of such excess over
$10,000,000 shall be payable to Abbott. The Company has accrued $3,000,000 as
the present value of this conditional obligation as of December 31, 1999,
assuming it would be payable in full in early 2001. The Company has no further
purchase commitments to Abbott, and Abbott has no further supply requirements to
Magainin.
Liquidity
The Company has not generated any revenues from product sales, and has
funded operations primarily from the proceeds of public and private placements
of securities. Substantial additional financing will be required by the Company
in the near-term to fund its continuing research and development activities. No
assurance can be given that any such financing will be available when needed or
that the Company's research and development efforts will be successful.
In the absence of raising additional funds or significantly reducing
expenses, the Company does not have sufficient resources to sustain operations
beyond 2000. The Company regularly explores alternative means of financing its
operations and seeks funding through various sources, including public and
private securities offerings and collaborative arrangements with third parties.
The Company currently does not have any commitments to obtain additional funds,
and may be unable to obtain sufficient funding in the future on acceptable
terms. If the Company cannot obtain funding, it will need to delay, scale back
or eliminate research and development programs or enter into collaborations with
third parties to commercialize potential products or technologies that it might
otherwise seek to develop or commercialize independently, or seek other
arrangements. If the Company engages in collaborations, it will receive lower
consideration upon commercialization of such products than if it had not entered
into such arrangements, or if it entered into such arrangements at later stages
in the product development process.
F-14
<PAGE>
Exhibit 3.4 - Amended and Restated By-Laws
MAGAININ PHARMACEUTICALS INC.
ARTICLE 1
Offices
-------
SECTION 1. Registered Office. The registered office of Magainin
-----------------
Pharmaceuticals Inc. (the "Corporation") in the State of Delaware shall be at
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New
Castle, and the registered agent in charge thereof shall be The Corporation
Trust Company.
SECTION 2. Other Offices. The Corporation may also have an office or
-------------
offices at other place or places within or without the State of Delaware.
ARTICLE 2
Meetings of Stockholders; Stockholders'
---------------------------------------
Consent in Lieu of Meeting
--------------------------
SECTION 1. Annual Meetings. The annual meeting of the stockholders
---------------
for the election of directors, and for the transaction of such other business as
may properly come before the meeting, shall be held at such place, date and hour
as shall be fixed by the Board of Directors (the "Board") and designated in the
notice or waiver of notice thereof; except that no annual meeting need be held
if all actions, including the election of directors, required by the General
Corporation Law of the State of Delaware to be taken at a stockholders' annual
meeting are taken by written consent in lieu of meeting pursuant to Section 10
of this Article.
SECTION 2. Special Meetings. A special meeting of the stockholders
----------------
for any purpose or purposes may be called by the Board, the Chairman, if any,
the President or the Secretary or the recordholders of at least a majority of
the shares of Common Stock of the
<PAGE>
Corporation issued and outstanding, to be held at such place, date and hour as
shall be designated in the notice or waiver of notice thereof.
SECTION 3. Notice of Meetings. Except as otherwise required by
------------------
statute or by the Certificate of Incorporation or these By-laws, notice of each
annual or special meeting of the stockholders shall be given to each stockholder
of record entitled to vote at such meeting not less than 10 or more than 60 days
before the day on which the meeting is to be held, by delivering a typewritten
or printed notice thereof to him personally, or by mailing a copy of such
notice, postage prepaid, directly to each such stockholder at his address as it
appears in the records of the Corporation, or by transmitting notice thereof to
him at such address by telegraph, cable or telephone. Every such notice shall
state the place and the date and hour of the meeting, and, in case of a special
meeting, the purpose or purposes for which the meeting is called. Notice of any
meeting of stockholders shall not be required to be given to any stockholder who
shall attend such meeting in person or by proxy, or who shall, in person or by
attorney thereunto authorized, waive such notice in writing, either before or
after such meeting. Except as otherwise provided in these By-laws, neither the
business to be transacted at, nor the purpose of, any meeting of the
stockholders need be specified in any such waiver of notice. Notice of any
adjourned meeting of stockholders shall not be required to be given, except when
expressly required by law.
SECTION 4. Quorum. At each meeting of the stockholders, except where
------
otherwise provided by the Certificate of Incorporation or these By-laws, the
holders of a majority of the issued and outstanding shares of stock of the
Corporation entitled to vote at such meeting, present in person or represented
by proxy, shall constitute a quorum for the transaction of business. In the
absence of a quorum a majority in interest of the stockholders present in person
-2-
<PAGE>
or represented by proxy and entitled to vote, or, in the absence of all the
stockholders entitled to vote, any officer entitled to preside at, or act as
secretary of, such meeting, shall have the power to adjourn the meeting from
time to time, until stockholders holding the requisite amount of stock shall be
present or represented. At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally called.
SECTION 5. Organization. At each meeting of the stockholders, one of
------------
the following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(1) the Chairman, if any;
(2) the President;
(3) any other officer of the Corporation designated by the Board
of Directors to act as chairman of such meeting and to preside thereat
if the Chairman, if any, or the President shall be absent from such
meeting; or
(4) a stockholder of record who shall be chosen chairman of such
meeting by a majority in voting interest of the stockholders present
in person or by proxy and entitled to vote thereat.
The Secretary, or if he shall be presiding over the meeting in accordance with
the provisions of this Section, or if he shall be absent from such meeting, the
person whom the chairman of such meeting shall appoint, shall act as secretary
of such meeting and keep the minutes thereof.
SECTION 6. Order of Business. The order of business at each meeting
-----------------
of the stockholders shall be determined by the chairman of such meeting, but
such order of business
-3-
<PAGE>
may be changed by a majority in voting interest of those present in person or by
proxy at such meeting and entitled to vote thereat.
SECTION 7. Voting. Except as otherwise provided by law or by the
------
Certificate of Incorporation or these By-laws, at each meeting of the
stockholders, every stockholder of the Corporation shall be entitled to one vote
in person or by proxy for each share of stock of the Corporation held by him and
registered in his name on the books of the Corporation:
(1) on the date fixed pursuant to Section 7 of Article VI as the
record date for the determination of stockholders entitled to vote at
such meeting; or
(2) if no such record date shall have been fixed, at the close of
business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
- -------- -------
meeting. Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor an the books of the Corporation, he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his proxy may represent such stock and vote thereon. If shares or
other securities having voting power stand in the record of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary shall be
given the
-4-
<PAGE>
written notice to the contrary and shall be furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(a) if only one votes, his act binds all;
(b) if more than one votes, the act of the majority so
voting binds all; and
(c) if more than one votes, but the vote is evenly split on
any particular matter, such shares shall be voted in the manner
provided by law.
If the instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even-split for the purposes of this Section shall be
the majority or even-split in interest. The Corporation shall not vote directly
or indirectly any share of its own capital stock. Any vote of stock may be
given by the stockholder entitled thereto in person or by his proxy appointed by
an instrument in writing, subscribed by such stockholder or by his attorney
thereunto authorized, delivered to the secretary of the meeting; provided,
--------
however, that no proxy shall be voted after three years from its date, unless
- -------
said proxy provides for a longer period. At all meetings of the stockholders,
all matters (except where other provision is made by law, by the Certificate of
Incorporation or these By-laws) shall be decided by the vote of a majority in
interest of the stockholders present in person or by proxy at such meeting and
entitled to vote thereon, a quorum being present. Unless demanded by a
stockholder present in person or by proxy at any meeting and entitled to vote
thereon, the vote on any question need not be by ballot. Upon a demand by any
such stockholder for a vote by ballot upon any question, such vote by ballot
shall
-5-
<PAGE>
be taken. On a vote by ballot, each ballot shall be signed by the stockholder
voting, or by his proxy, if there be such proxy, and shall state the number of
shares voted.
SECTION 8. Inspection. The chairman of the meeting may at any time
----------
appoint two or more inspectors to serve at any meeting of the stockholders. Any
inspector may be removed, and a new inspector or inspectors appointed, by the
Board at any time. Such inspectors shall decide upon the qualifications of
voters, accept and count votes, declare the results of such vote, and subscribe
and deliver to the secretary of the meeting a certificate stating the number of
shares of stock issued and outstanding and entitled to vote thereon and the
number of shares voted for and against the question, respectively. The
inspectors need not be stockholders of the Corporation, and any director or
officer of the Corporation may be an inspector other than a vote for or against
his election to any position with the Corporation or on any other matter in
which he may be directly interested. Before acting as herein provided, each
inspector shall subscribe an oath faithfully to execute the duties of an
inspector with strict impartiality and according to the best of his ability.
SECTION 9. List or Stockholders. It shall be the duty of the
--------------------
Secretary or other officer of the Corporation who shall have charge of its stock
ledger to prepare and make, at least 10 days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote thereat,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to any
such meeting, during ordinary business hours, for a period of at least 10 days
prior to such meeting, either at a place within the city where such meeting is
to be held, which place shall be specified in the notice of the meeting
-6-
<PAGE>
or, if not so specified, at the place where the meeting is to be held. Such list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
SECTION 10. Stockholders' Consent In Lieu of Meeting. Any action
----------------------------------------
required by the General Corporation Law of the State of Delaware to be taken at
any annual or special meeting of the stockholders of the Corporation, or any
action which may be taken at any annual or special meeting of such stockholders,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by all
the stockholders.
ARTICLE 3
Board of Directors
------------------
SECTION 1. General Powers. The business, property and affairs of the
--------------
Corporation shall be managed by the Board, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law or by
the Certificate of Incorporation directed or required to be exercised or done by
the stockholders.
SECTION 2. Number and Term of Office. The number of directors shall
-------------------------
be fixed from time to time by the whole Board. The term "whole Board" is used
herein to refer to the number of directors from time to time authorized to be on
the Board regardless of the number of directors then in office. Directors need
not be stockholders. Each director shall hold office until his successor is
elected and qualified, or until his earlier death or resignation or removal in
the manner hereinafter provided.
-7-
<PAGE>
SECTION 3. Election of Directors. At each meeting of the
---------------------
stockholders for the election of directors at which a quorum is present, the
persons receiving the greatest number of votes, up to the number of directors to
be elected, of the stockholders present in person or by proxy and entitled to
vote thereon shall be the directors. Unless an election by ballot shall be
demanded as provided in Section 7 of Article II, election of directors may be
conducted in any manner approved at such meeting.
SECTION 4. Resignation, Removal and Vacancies. Any director may
----------------------------------
resign at any time by giving written notice to the Board, the Chairman, if any,
the President or the Secretary. Such resignation shall take effect at the time
specified therein or, if the time be not specified, upon receipt thereof; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Any director or the entire Board may be removed, with or without
cause, at any time by vote of the holders two-thirds of the shares then entitled
to vote at an election of directors, or by written consent of the stockholders
pursuant to Section 10 of Article 11.
Vacancies occurring in the Board for any reason may be filled by vote
of the stockholders or by their written consent pursuant to Section 10 of
Article II or by vote of the Board or by the directors' written consent pursuant
to Section 6 of this Article. If the number of directors then in office is less
than a quorum, such other vacancies may be filled by vote of a majority of the
directors then in office.
SECTION 5. Meetings.
--------
(1) Annual Meetings. As soon as practicable after each annual
---------------
election of directors, the Board shall meet for the purpose of organization and
the transaction of other
-8-
<PAGE>
business, unless it shall have transacted all such business by written consent
pursuant to Section 6 of this Article.
(2) Other Meetings. Other meetings of the Board shall be held at such
--------------
times and places as the Board, the Chairman, if any, or the President shall from
time to time determine.
(3) Notice of Meetings. The Secretary shall give notice to each
------------------
director of each meeting, including the time, place and purpose of such meeting.
Notice of each such meeting shall be mailed to each director, addressed to him
at his residence or usual place of business, at least two days before the day on
which such meeting is to be held, or shall be sent to him at such place by
telegraph, cable, wireless or other form of recorded communication, or be
delivered personally or by telephone not later than the day before the day on
which such meeting is to be held, but notice need not be given to any director
who shall attend such meeting. A written waiver or notice, signed by the person
entitled thereto, whether before or after the time of the meeting stated
therein, shall be deemed equivalent to notice.
(4) Place of Meetings. The Board may hold its meetings at such place
-----------------
or places within or without the State of Delaware as the Board may from time to
time determine, or as shall be designated in the respective notices or waivers
of notice thereof.
(5) Quorum and Manner of Acting. One-third of the total number of
---------------------------
directors then in office (but not less than two if the number of directors is
greater than one) shall be present in person at any meeting of the Board in
order to constitute a quorum for the transaction of business at such meeting,
and the vote of a majority of those directors present at any such meeting at
which a quorum is present shall be necessary for the passage of any resolution
or act of the Board, except as otherwise expressly required by law or these By-
laws. In the absence of
-9-
<PAGE>
a quorum for any such meeting, a majority of the directors present thereat may
adjourn such meeting from time to time until a quorum shall be present.
(6) Organization. At each meeting of the Board, one of the following
------------
shall act as chairman of the meeting and preside, in the following order of
precedence:
(2) the Chairman, if any;
(3) the President (if a director);
(4) any director chosen by a majority of the directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the Chairman
shall appoint shall act as secretary of such meeting and keep the minutes
thereof.
SECTION 6. Directors' Consent in Lieu of Meeting. Any action
-------------------------------------
required or permitted to be taken at any meeting of the Board may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by all the directors
and such consent is filed with the minutes of the proceedings of the Board.
SECTION 7. Action by Means of Conference Telephone or Similar
--------------------------------------------------
Communications Equipment. Any one or more members of the Board may participate
- ------------------------
in a meeting of the Board by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting by such means shall
constitute presence in person at such meeting.
ARTICLE 4
Officers
--------
-10-
<PAGE>
SECTION 1. Executive Officers. The executive officers of the
------------------
Corporation shall be a President, a Secretary and a Treasurer and may include a
Chairman and such other officers as the Board may appoint pursuant to Section 3
of this Article. Any two or more offices may be held by the same
SECTION 2. Authority All officers, as between themselves and the
---------
Corporation, shall have such authority and perform such duties in the management
of the Corporation as may be provided in these By-laws or, to the extent so
provided, by the Board.
SECTION 3. Other Officers. The Corporation may have such other
--------------
officers, agents and employees as the Board may deem necessary, including one or
more Assistant Secretaries and one or more Assistant Treasurers, each of whom
shall hold office for such period, have such authority, and perform such duties
as the Board, the Chairman of the Board, if any, or the President may from time
to time determine. The Board may delegate to any principal officer the power to
appoint or remove any such officers, agents or employees.
SECTION 4. Term of Office, Resignation and Removal. All officers
---------------------------------------
shall be elected or appointed by the Board and shall hold office for such term
as may be prescribed by the Board. Each officer shall hold office until his
successor has been elected or appointed and qualified or his earlier death or
resignation or removal in the manner hereinafter provided. The Board may
require any officer to give security for the faithful performance of his duties.
Any officer may resign at any time by giving written notice to the
Board or to the chairman, if any, the President or the Secretary, and such
resignation shall take effect At the time specified therein or, if the time when
it shall become effective is not specified therein, at the time
-11-
<PAGE>
it is accepted by action of the Board. Except as aforesaid, the acceptance of
such resignation shall not be necessary to make it effective.
All officers and agents elected or appointed by the Board shall be
subject to removal at any time by the Board or by the stockholders of the
Corporation with or without cause.
SECTION 5. Vacancies. If the office of President, Secretary or
---------
Treasurer becomes vacant for any reason, the Board shall fill such vacancy, and
if any other office becomes vacant, the Board may fill such vacancy. Any
officer so appointed or elected by the Board shall serve only until such time as
the unexpired term of his predecessor shall have expired unless reelected or
reappointed by the Board.
SECTION 6. Chairman of the Board. If there shall be a Chairman of
---------------------
the Board, he shall preside at meetings of the Board and of the stockholders at
which he is present, and shall give counsel and advise to the Board and the
officers of the Corporation on all subjects concerning the welfare of the
Corporation and the conduct of its business. He shall perform such other duties
as the Board may from time to time determine.
SECTION 7. The President. The President shall be the Chief Executive
-------------
Officer of the Corporation and unless the Chairman be appointed and present or
the Board has provided otherwise by resolution, he shall preside at all meetings
of the Board and the stockholders at which he is present. He shall have general
and active management and control of the business and affairs of the corporation
subject to the control of the Board, and shall see that all orders and
resolutions of the Board are carried into effect.
-12-
<PAGE>
SECTION 8. The Secretary. The Secretary shall, to the extent
-------------
practicable, attend all meetings of the Board and all meetings of the
stockholders and shall record all votes and the minutes of all proceedings in a
book to be kept for that purpose. He shall give, or cause to be given, notice of
all meetings of the stockholders and of the Board, and shall perform such other
duties as may be prescribed by the Board, the Chairman, if any, or the
President, under whose supervision he shall act. He shall keep in safe custody
the seal of the Corporation and affix the same to any duly authorized instrument
requiring it and, when so affixed, it shall be attested by his signature or by
the signature of the Treasurer or, if appointed, an Assistant Secretary or an
Assistant Treasurer. He shall keep in safe custody the certificate books and
stockholder records and such other books and records as the Board may direct and
shall perform all other duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him by the Chairman, if
any, President or the Board.
SECTION 9. The Treasurer. The Treasurer shall have the care and
-------------
custody of the corporate funds and other valuable effects, including securities,
and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation, and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board, taking proper vouchers for such
disbursements, and shall render to the Chairman, if any, President and
directors, at the regular meetings of the Board, or whenever they may require
it, an account of all his transactions as Treasurer and of the financial
condition of the Corporation; and, in general, perform all the duties incident
to the
-13-
<PAGE>
office of Treasurer and such other duties as from time to time may be assigned
to him by the Chairman, if any, President or the Board.
ARTICLE 5
Contracts, Checks, Drafts, Bank Accounts, Etc.
---------------------------------------------
SECTION 1. Execution of Documents. The Board shall designate the
----------------------
officers, employees and agents of the Corporation who shall have power to
execute and deliver deeds, contracts, mortgages, bonds, debentures, checks,
drafts and other orders for the payment of money and other documents for and in
the name of the Corporation, and may authorize such officers, employees and
agents to delegate such power (including authority to redelegate) by written
instrument to other officers, employees of agents of the Corporation; and,
unless so designated or expressly authorized by these By-laws, no officer or
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable
pecuniarily for any purpose or to any amount.
SECTION 2. Deposits. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as the Board or Treasurer, or any other officer of the Corporation
to whom power in this respect shall have been given by the Board, shall select.
SECTION 3. Proxies in Respect of Stock or Other Securities of Other
--------------------------------------------------------
Corporations. The Board shall designate the officers of the Corporation who
- ------------
shall have authority from time to time to appoint an agent or agents of the
Corporation to exercise in the name and on behalf of the Corporation the powers
and rights which the corporation may have as the holder of stock or other
securities in any other corporation, and to vote or consent in respect of such
stock
-14-
<PAGE>
or securities. Such designated officers may instruct the person or persons so
appointed as to the manner of exercising such powers and rights, and such
designated officers may execute or cause to be executed in the name and on
behalf of the Corporation and under its corporate seal, or otherwise, such
written proxies, powers of attorney or other instruments as they may deem
necessary or proper in order that the Corporation may exercise its said powers
and rights.
ARTICLE 6
Shares and Their Transfer; Fixing Record Date
---------------------------------------------
SECTION 1. Certificates for Shares. Every owner of stock of the
-----------------------
Corporation shall be entitled to have a certificate certifying the number and
class of shares owned by him in the Corporation, which shall otherwise be in
such form as shall be prescribed by the Board. certificates shall be issued in
consecutive order and shall be numbered in the order of their issue, and shall
be signed by, or in the name of, the Corporation by the Chairman, if any, the
President or any Vice President and by the Treasurer (or an Assistant Treasurer,
if appointed) or the Secretary (or an Assistant Secretary, if appointed). In
case any officer or officers who shall have signed any such certificate or
certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate had not
ceased to be such officer or officers of the Corporation.
SECTION 2. Record. A record (herein called the stock record) in one
------
or more counterparts shall be kept of the name of the person, firm or
corporation owning the shares
-15-
<PAGE>
represented by each certificate for stock of the Corporation issued, the number
of shares represented by each such certificate, the date thereof and, in the
case of cancellation, the date of cancellation. Except as otherwise expressly
required by law, the person in whose name shares of stock stand on the stock
record of the Corporation shall be deemed the owner thereof for all purposes as
regards the Corporation.
SECTION 3. Transfer and Registration of Stock.
----------------------------------
(a) The transfer of stock and certificates of stock which represent
the stock of the Corporation shall be governed by Article 8 of Subtitle 1 of
Title 6 of the Delaware Code (the Uniform Commercial Code), as amended from time
to time.
(b) Registration of transfers of shares of the Corporation shall be
made only an the books of the Corporation upon request of the registered holder
thereof, or of his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the Corporation, and upon the surrender
of the certificate or certificates for such shares properly endorsed or
accompanied by a stock power duly executed.
SECTION 4. Addresses of Stockholders. Each stockholder shall
-------------------------
designate to the Secretary an address at which notices of meetings and all other
corporate notices may be served or mailed to him, and, if any stockholder shall
fail to designate such address, corporate notices may be served upon him by mail
directed to him at his post office address, if any, as the same appears on the
share record books of the Corporation or at his last known post-office address.
SECTION 5. Lost, Destroyed and Mutilated Certificates. The holder of
------------------------------------------
any shares of the Corporation shall immediately notify the Corporation of any
loss, destruction or mutilation of the certificate therefor, and the Board may,
in its discretion, cause to be issued to
-16-
<PAGE>
him a new certificate or certificates for shares, upon the surrender of the
mutilated certificates or, in the case of loss or destruction of the
certificate, upon satisfactory proof of such loss or destruction, and the Board
may, in its discretion, require the owner of the lost or destroyed certificate
or his legal representative to give the Corporation a bond in such sum and with
such surety or sureties as it may direct to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate.
SECTION 6. Regulations. The Board may make such rules and
-----------
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates for stock of the
Corporation.
SECTION 7. Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE 7
-17-
<PAGE>
Seal
----
The Board may provide a corporate seal, which shall be in the form of
a circle and shall bear the full name of the Corporation and the words and
figures "Corporate Seal Delaware."
ARTICLE 8
Fiscal Year
-----------
The fiscal year of the Corporation shall be determined by the Board of
Directors.
ARTICLE 9
Indemnification and Insurance
-----------------------------
SECTION 1. Indemnification. (a) To the fullest extent permitted by
---------------
the Delaware General Corporation Law as the same exists or may hereafter be
amended, a director of this Corporation shall not be liable to the Corporation
or its stockholders for breach of fiduciary duty as a director.
(b) Any person made, or threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by the reason of the fact that he,
his testator or intestate is or was a director, officer, employee or agent of
the Corporation shall be indemnified by the Corporation against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, or in connection with any appeal therein; provided, that such person
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, or with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
unlawful; except that no indemnification shall be made in the case of an action,
suit or
-18-
<PAGE>
proceeding by or in the right of the Corporation in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such
director, officer, employee or agent is liable to the Corporation, unless a
court having jurisdiction shall determine that, despite such adjudication, such
person is fairly and reasonably entitled to indemnification.
(c) Without limitation of any right conferred by paragraph (a) of this
Section, any person made, or threatened to be made, a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he, his testator or
intestate is or was a director, officer, employee or agent of the Corporation,
or is or was acting at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise including, without limitation, as a fiduciary of, or otherwise
rendering services to, any employee benefit plan of or relating to the
Corporation, shall be indemnified by the Corporation against expenses (including
attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, or in connection with any appeal therein; provided, that such person
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, or with respect to a criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful; except that no indemnification shall be made in the case of an action,
suit or proceeding by or in the right of the Corporation in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
director, officer, employee or agent is liable to the Corporation unless a court
having jurisdiction shall determine that, despite such adjudication, such person
is fairly and reasonably entitled to indemnification.
-19-
<PAGE>
(d) The foregoing rights of indemnification shall not be deemed
exclusive of any other rights to which any director, officer, employee or agent
may be entitled or of any power of the Corporation apart from the provisions of
this Section.
SECTION 2. Insurance for Indemnification. The Corporation may
-----------------------------
purchase and maintain insurance for the indemnification of the corporation and
the directors, officers, employees and agents of the Corporation to the full
extent and in the manner permitted by the applicable laws of the United States
and the State of Delaware from time to time in effect.
ARTICLE 10
Option Repricing
----------------
In no event shall any stock option already issued and outstanding be
repriced to a lower strike price at any time during the term of such option,
without the prior affirmative vote of a majority of shares of stock of the
Corporation present at a stockholders' meeting in person or by proxy and
entitled to vote thereon. Any amendment or repeal of this provision requires the
affirmative vote of the holders of the majority of the shares of stock of the
Corporation present at a stockholders' meeting in person or by proxy and
entitled to vote thereon.
ARTICLE 11
Amendments
----------
Any by-law (including these By-laws) may be adopted, amended or
repealed by the vote of the holders of a majority of the shares then entitled to
vote at an election of directors or by consent of the stockholders pursuant to
Section 10 of Article II, or by vote of the Board or by the directors' written
consent pursuant to Section 6 of Article III.
-20-
<PAGE>
EXHIBIT 10.12
((Date))
((First Name)) ((Last Name))
((Address))
((City)),((State)) ((Postal Code))
Dear ((First Name)):
I am pleased to inform you that the Board of Directors of the Company has
determined to award you shares of the Company's common stock. Provided that you
remain an employee of the Company in good standing, such shares will be granted
to you as follows:
_______ shares on ((Date))
_______ shares on ((Date))
_______ shares on ((Date))
_______ shares on ((Date))
These awards will be restricted stock grants under the Company's 1998 Equity
Compensation Plan and, therefore, will be subject to certain restrictions and
conditions as prescribed by the Plan.
If any change is made to the Company's common stock (whether by reason of
merger, consolidation, reorganization, recapitalization, stock divident, stock
split, combination of shares, or exchange of shares or any other change in
capital structure made without receipt of consideration), then the amount of
nature of hte shares to be granted pursuant hereto shall be subject to such
adjustment as the Board of Directors deems appropriate.
We appreciate you continued loyalty and dedication to the Company and its
future.
Sincerely,
Michael R. Dougherty
President and Chief Executive Officer
<PAGE>
SCHEDULE OF 1998 STOCK AWARDS
<TABLE>
<CAPTION>
Date on Which Shares Number of Shares
Name of Employee Will Be Granted to Be Granted
- --------------------------------- -------------------- ----------------
<S> <C> <C>
Michael R. Dougherty August 11, 1999 12,500
August 11, 2000 12,500
August 11, 2001 12,500
August 11, 2002 12,500
Roy C. Levitt, M.D. August 11, 1999 9,000
August 11, 2000 9,000
August 11, 2001 9,000
August 11, 2002 9,000
Michael A. Zasloff, M.D., Ph.D. August 11, 1999 5,000
August 11, 2000 5,000
August 11, 2001 5,000
August 11, 2002 5,000
Kenneth J. Holroyd, M.D. August 11, 1999 5,000
August 11, 2000 5,000
August 11, 2001 5,000
August 11, 2002 5,000
</TABLE>
<PAGE>
SCHEDULE OF 1999 STOCK AWARDS
<TABLE>
<CAPTION>
Date on Which Shares Number of Shares
Name of Employee Will Be Granted to Be Granted
- --------------------------------- -------------------- ----------------
<S> <C> <C>
Michael R. Dougherty July 9, 2000 3,750
July 9, 2001 3,750
July 9, 2002 3,750
July 9, 2003 3,750
Roy C. Levitt, M.D. July 9, 2000 1,875
July 9, 2001 1,875
July 9, 2002 1,875
July 9, 2003 1,875
Michael A. Zasloff, M.D., Ph.D. July 9, 2000 1,250
July 9, 2001 1,250
July 9, 2002 1,250
July 9, 2003 1,250
Kenneth J. Holroyd, M.D. July 9, 2000 1,250
July 9, 2001 1,250
July 9, 2002 1,250
July 9, 2003 1,250
</TABLE>
<PAGE>
EXECUTION COPY
--------------
* The confidential material contained herein has been omitted and filed
separately wth the Commission.
COLLABORATIVE RESEARCH AND OPTION AGREEMENT
December 30, 1995
THIS COLLABORATIVE RESEARCH AND OPTION AGREEMENT ("Agreement") is made
as of the date first written above ("Effective Date") by and between Magainin
Pharmaceuticals Inc., a Delaware corporation, having a place of business at 5110
Campus Drive, Plymouth Meeting, Pennsylvania 19462 ("Magainin") and Genentech
Inc., a Delaware corporation having a place of business at 1 DNA Way South San
Francisco, California 94080 ("Genentech").
RECITALS
WHEREAS, Magainin has undertaken certain research efforts relating to
the role of IL-9 in asthma, and
WHEREAS, Genentech desires to conduct research to determine the role of
IL-9 in reducing the symptoms of asthma, and
WHEREAS, Genentech desires to receive from Magainin an exclusive option
to negotiate a development and commercialization agreement, and
WHEREAS, Magainin is interested in providing such an option to
Genentech,
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the Parties hereto
agree as follows:
1 DEFINITIONS
1.1 "Compound" shall mean a protein that directly or indirectly
----------
inhibits the production, action or effect of IL-9.
1.2 "Field" shall mean the prevention or treatment of human asthma
-------
and bronchial hyperresponsiveness by the therapeutic use of a Compound.
1.3 "Know-How" shall mean information, expertise and intellectual
----------
property that relates to Compound
1.5 "Licensed Patent Rights" shall mean all current and future
------------------------
patents and patent applications throughout the world (including all extensions,
substitutions, reissues, and reexaminations of the foregoing) having claims
directed to any Compound in the Field (a) that Magainin owns (in whole or in
part) or controls and has the right to license or sublicense or (b) that result
from research performed under the Research Plan.
1.6 "Reagents" shall mean reagents listed in Appendix B.
---------- ----------
<PAGE>
1.7 "Research" shall mean research work of the Parties on Compound.
----------
1.8 "Research Plan" shall mean the research plan attached to this
---------------
Agreement as Appendix A.
1.9 "Research Term" shall mean the period of time commencing upon
---------------
the Effective Date and terminating on December 31, 1999, unless the affinity of
Magainin's antibody is found to be worse than that specified in Research Plan,
in which case, the Parties agree to mutually extend the Research Term.
1.10 "Results" shall mean any and all materials, information,
---------
discoveries, ideas, Know-How, data and techniques that are made, created or
reduced to practice in the course of, or as a result of, the Research.
1.11 "Stock Purchase Agreement" shall mean the agreement attached as
--------------------------
Appendix C.
- ----------
1.12 "Third Party" shall mean any person other than a Party to this
-------------
Agreement.
2. RESEARCH
2.1 Research Plan - During the Research Term, Magainin and
-------------
Genentech shall jointly conduct Research pursuant to the Research Plan.
Each of the Parties shall allocate sufficient resources,
including, without limitation, personnel, equipment, supplies, reagents and
facilities, to conduct Research as set forth in the Research Plan. Each Party
shall be responsible for its own expenses and costs incurred under the Research
Plan.
Magainin shall provide to Genentech at no cost reasonable
quantities of Reagents that may be requested from time to time under the
Research Plan.
2.2 Exclusive Research Relationship - During the Research Term,
-------------------------------
neither Party may conduct research on Compound with any Third Party without the
prior written consent of the other Party.
2.3 Intellectual Property - All patents and patent applications that
---------------------
result from sole Genentech inventions under the Research Plan, shall be
exclusively owned by Genentech. Any joint inventions shall be owned by the
Parties jointly. All title and interest in any Results obtained by Genentech
under the Research Plan will belong to Genentech, although Genentech shall
provide Magainin free access to and use of Results. If for any reason the
Parties do not enter into a research and development agreement as contemplated
by Section 3.1 hereof, Genentech shall negotiate in good faith with Magainin to
grant Magainin a license for any
2
<PAGE>
Genentech intellectual property developed under the Research Plan either solely
or jointly with Magainin.
3. OPTION
3.1 Option Grant - Magainin hereby grants to Genentech an exclusive
------------
option to enter into an agreement to develop and commercialize any and all
Compounds in the Field, exercisable for one hundred twenty (120) days after the
end of the Research Term. Such agreement shall include: (a) the grant by
Magainin to Genentech of an exclusive worldwide sublicensable license (the
"License") under Magainin's Licensed Patent Rights and Know-How to make, have
made, use, sell, offer for sale and import Compound in the Field; (b) maximum
aggregate payments by Genentech under such agreement for any signing fee,
sponsored research and development, development and approval milestones, and all
other payments of any form except royalties, shall not exceed $35.0 million,
which may be paid in one or more of the following forms, a loan, equity
investment pursuant to the terms of the Stock Purchase Agreement or cash; and
(c) a royalty of up to ()% of net sales of Compound in the Fields prior to *
Third Party royalty offsets to be negotiated. The precise royalty to be agreed
upon will depend on the relative intellectual property contribution (both Know-
How and patents) of Magainin to the development and commercial exclusivity of a
Compound in the Field. The Parties have discussed Genentech's standard deal
structure of off balance sheet financing and back-end loaded deals weighted
toward approval milestones. The Parties recognize that the final negotiated deal
must be fair to both Parties consistent with the facts (e.g., scope of
collaboration contemplated) and data (e.g., Research Plan results) available at
the time of the negotiation and conform to the broad deal outline and structure
noted above The Parties agree to negotiate in good faith the other terms of such
development and commercialization agreement.
Magainin shall notify Genentech of any serious negotiations with
Third Parties involving small molecules, that directly or indirectly inhibits
the production, action or effect of IL9 in the prevention or treatment of human
asthma and bronchial hyperresponsiveness, and will negotiate in good faith with
Genentech to enter into a collaboration in such area.
3.2 Equity Purchase - Genentech shall make an equity investment in
---------------
Magainin as provided for in the Stock Purchase Agreement.
4. LICENSES
4.1 License Grant - During the Research Term, and only to the extent
-------------
necessary to conduct its activities under the Research Plan,. Magainin grants to
Genentech a license under Licensed Patent Rights and Know-How in the Field
3
* THE CONFIDENTIAL MATERIAL CONTAINED
HEREIN HAS BEEN OMITTED AND HAS BEEN
FILED SEPARATELY WITH THE COMMISSION
<PAGE>
5. FUTURE RIGHTS
5.1 To the extent Magainin obtains rights to a Compound outside of
the Field, and Genentech wishes to collaborate with Magainin, Magainin agrees to
negotiate in good faith with Genentech to enter into a collaboration in such
area.
6. TERM AND TERMINATION
6.1 Term - The Agreement shall commence upon the Effective Date and
----
shall expire at the end of the Research Term, unless extended by the written
agreement of the Parties.
6.2 Termination - Genentech may terminate this Agreement at any time
-----------
during the Research Term upon thirty (30) days written notice to Magainin
Upon the termination of the Agreement, all licenses granted to
Genentech shall terminate.
7. CONFIDENTIAL INFORMATION, PUBLICITY
7.1 Requirement of Confidentiality -- This Agreement contemplates
------------------------------
the exchange of certain confidential and proprietary information by one Party
(the "Disclosing Party") to the other Party (the "Receiving Party") during the
term of this Agreement (the "Confidential Information) and the development of
certain confidential and proprietary information in the course of the
collaboration by the Parties hereunder, including, without limitation, Know-How
and Results (the "Research Information") (the Confidential Information and
Research Information are collectively referred to hereinafter as the
"Information"). With respect to the Information, each Party, shall:
(a) use such Information only for the purpose of
performing its duties or exercising its rights under this Agreement
and for no other purpose, subject to the terms and conditions of this
Agreement;
(b) safeguard such Information against disclosure to
others with the same degree of care as it exercises with its own data
of a similar nature, but not less than a reasonable degree of care;
and
(c) not disclose such Information to others (except to its
employees, or consultants, who are bound to the Receiving Party by a
like obligation of confidentiality and restriction on use) without
the express written consent of the other Party.
4
<PAGE>
7.2 Confidential Information - The commitments set forth in Section
------------------------
7.1 shall be of five (5) years' duration from date of disclosure and shall not
impose any obligation upon a Party with respect to any portion of the
Information which such Patty can establish:
(a) Was known to the Receiving Party prior to the receipt of the
same directly or indirectly from the Disclosing Party; or
(b) Is now, or becomes in the figure, public knowledge other
than through acts or omissions of the Receiving Party; or
(c) Is disclosed at any time to the Receiving Party by a Third
Party that had a lawful right to disclose it; or
(d) Is subsequently developed by either Party independent of the
Information received hereunder; or
(e) Has been or is subsequently disclosed by the Disclosing
Party to any Third Party on a non-confidential basis.
7.3 Publicity and News Releases -- Except as may be required by
---------------------------
applicable laws, rules or regulations, neither Party will originate any
publicity, news release, or other public announcement, written or oral, whether
to the public press or otherwise, relating to any amendment hereto or to
performance hereunder or the existence of this Agreement or an arrangement
between the Parties relating to this Agreement, without the prior written
approval of the other Party. In the event disclosure is required by applicable
law, rules or regulations, then the Party required to so disclose such
information shall, to the extent possible, provide to the other Party for its
approval (such approval not to be unreasonably withheld), a written copy of such
public announcement at least five (5) business days prior to disclosure.
Notwithstanding the foregoing, Magainin shall have the right to make a press
release with respect to its entering into this Agreement. Magainin shall provide
to Genentech a copy of the proposed press release no less than three (3)
business days prior to its proposed release. The contents of such press release
shall be subject to Genentech's consent, such consent not to be unreasonably
withheld.
8 MISCELLANEOUS
8.1 Entire Agreement Amendment - This Agreement, together with the
--------------------------
Stock Purchase Agreement attached hereto as Appendix C and the documents
----------
contemplated thereby, constitute the entire Agreement between the Parties
relating to the subject matter hereof and supersede all previous writings and
understandings whether oral or written, relating to such subject matter. This
Agreement may not be amended, supplemented or otherwise modified except by an
instrument in writing signed by both Parties that specifically refers to this
Agreement.
5
<PAGE>
8.2 Notices -- Any notice or other communication required or
-------
permitted under this Agreement shall be sent by certified mail or courier
service, charges prepaid, or by facsimile transmission, to the address or
facsimile number specified below:
If to Magainin:
Magainin Pharmaceuticals Inc
5110 Campus Drive
Plymouth Meeting, PA 19462
Fax No: 610-941-5399
Attention: Corporate Secretary
If to Genentech:
Genentech, Inc
1 DNA Way
South San Francisco, CA 94080
Fax No: 650-952-9881
Attention: Corporate Secretary
or to such other address or facsimile number as the person may specify in a
notice duly given to the sender as provided herein. A notice will be deemed to
have been given upon its deposit in the United States mail or with a courier
service, or, in the case of facsimile transmission, upon machine confirmation
that such transmission has been received.
8.3 Headings and Reference -- All section headings contained in this
----------------------
Agreement are for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement. Unless the context requires otherwise, all
references in this Agreement to any section, exhibit or appendix shall be deemed
and construed as reference to a section of, or an exhibit or appendix to, this
Agreement, any such exhibits and appendices are hereby incorporated in this
Agreement by such reference.
8.4 Assignment and Binding Effect -- This Agreement and the licenses
-----------------------------
herein granted shall be binding upon and inure to the benefit of the successors
and assigns of the Parties hereto. Neither Party may assign any of its rights,
or delegate any of its obligations, under this Agreement without the written
consent of the other Party. Notwithstanding the foregoing, either Party may,
without obtaining the consent of the other Party, assign this Agreement to any
Affiliate or to any corporation with which it may merge or consolidate, or to
which it may transfer all or substantially all of its assets to which this
Agreement relates.
8.5 Severability -- In the event that any provision of this
------------
Agreement shall be held illegal, void or ineffective, the remaining portions
hereof shall remain in full force and effect so long as such remaining portions
do not materially change the intent of this Agreement or the right or
obligations of the Parties hereunder. If any provision of this Agreement is in
conflict with any applicable statute or law in any jurisdiction, then such
provision shall be
6
<PAGE>
deemed inoperative in such jurisdiction to the extent of such conflict and the
Parties will renegotiate the affected provisions of this Agreement to resolve
any inequities. It is the intention of the Parties that, if any court or other
tribunal construes any provision or clause of this Agreement, or any portion
thereof, to be illegal, void or unenforceable because of the duration of such
provision or the area or matter covered thereby, such court shall reduce the
duration, area or matter of such provision and enforce such provision in its
reduced form.
8.6 No Conflicts -- Each Party represents and warrants to the other
------------
that it has the lawful right to enter into and perform its obligations under
this Agreement, and that the terms of the Agreement do not conflict with any
other obligations of such Party.
8.7 Governing Law - This Agreement shall be governed in all respects
-------------
by the laws of the State of New York applicable to contracts between New York
residents entered into and to be performed entirely within the State of New
York.
8.8 Counterparts; Facsimile -- This Agreement may be executed in any
-----------------------
number of counterparts and by facsimile, each of which may be executed by fewer
than all of Parties hereto, each of which shall be enforceable against the
Parties actually executing such counterparts, and all of which together shall
constitute one instrument.
[signature page follows]
7
<PAGE>
IN WITNESS WHEREOF, the Parties, through their authorized officers, have
duly executed this Agreement as of the date first written above.
MAGAININ PHARMACEUTICALS INC GENENTECH, INC.
By: /s/ Michael R. Dougherty By: /s/ W. D. Young
--------------------------- ------------------------------
Name: Michael R. Dougherty Name: William D. Young
Title: President and Chief Title: Chief Operating Officer
Executive Officer
<PAGE>
APPENDIX A
----------
Genentech Program to Evaluate the Role of IL-9 in Murine Asthma
***
1
* THE CONFIDENTIAL MATERIAL CONTAINED
HEREIN HAS BEEN OMITTED AND HAS BEEN
FILED SEPARATELY WITH THE COMMISSION
<PAGE>
Appendix B
Reagent List 12-29-98
---------------------
***
* THE CONFIDENTIAL MATERIAL CONTAINED
HEREIN HAS BEEN OMITTED AND HAS BEEN
FILED SEPARATELY WITH THE COMMISSION
<PAGE>
APPENDIX C
----------
Stock Purchase Agreement between Magainin
Pharmaceuticals Inc. and Genentech Inc., dated December 30, 1998
*This agreement is being filed separately as Exhibit 10.33 to the Registrant's
Form 10-K405/A.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Magainin Pharmaceuticals Inc.:
We consent to incorporation by reference in the registration statement Nos. 33-
52882, 33-61530, 33-71984, 33-82196, 33-96426, 333-10889 and 333-62073 on Form
S-8 and registration statement Nos. 33-69544, 33-99528, 333-09927, 333-14555,
333-38271 and 333-49681 on Form S-3 of Magainin Pharmaceuticals Inc. of our
report dated February 11, 2000, relating to the balance sheets of Magainin
Pharmaceuticals Inc. as of December 31, 1999 and 1998, and the related
statements of operations, changes in stockholders' equity and comprehensive loss
and cash flows for each of the years in the three-year period ended December 31,
1999, which report appears in the December 31, 1999 annual report on Form 10-K
of Magainin Pharmaceuticals Inc.
KPMG LLP
Princeton, New Jersey
March 14, 2000
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAGAININ
PHARMACEUTICALS INC. FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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